Has the Global Economic System “Raised All Boats”?

Written By: Dennis Shen, Raktim Roy and Joséphine Gantois

The design of a global economic system that supports inclusive growth is central to today’s policy debate. The current global economic model has been in-place since the 1980s: the decade in which free market thinking revolutionized the world economy. The neoliberal system adopted since that time has engineered a world with less trade barriers, globalized markets, and minimal government intervention – based on the belief that a pro-market, anti-governance approach would support human welfare. Globalization has been an important outcome, and has re-shaped our lives.

Now, there exists an active debate on whether the neoliberal system has been a success. Proponents of globalization and free trade would say that the world is the better for it – proponents like Martin Wolf write that inequality and poverty are declining in large part due to globalization forces. But on the other end, outspoken voices like Robert Wade at the London School of Economics would say that rather than supporting lower inequality and improvements in welfare, the current system has in many ways held the rich countries up and the poor countries down.

What then do the empirics tell us about this debate? Has the current economic system “raised all boats”?

The record on growth is perhaps the most clear: rather than a post-globalization world with high growth, world growth has slowed in recent decades, from averaging 5.6% in the 1960s to just 2.7% by this last decade. In addition, the world economy has become more volatile, with an increased frequency of financial crises – which hit the most vulnerable the hardest.

However, the story about income convergence between North and South is divided: prior to 2000, there was very little evidence of convergence (Figure 1); but since 2000, there has been a structural break – in the twelve years since then, the developing countries have averaged 6% annual growth, as compared to 1.8% in the developed countries. Economic and political stabilization in many parts of the developing world, a second wave of globalization in production chains, cross-border investment from Western multinational corporations, and a game-changing economic transformation in China would introduce a newly-resurgent developing world, converging strongly to the high income countries, and resulting in many proclaims that globalization is at last working to bring about North and South integration.

Figure 1: Growth Story Divided Between Pre-2000 and Post-2000

GDP Per Capita, % of High Income Countries, By Region

Figure_1

Source: World Bank

Global inequality numbers also display complex and divided trends. Inequality between nations increased from 1980 – 2000 but has since tailed downwards post-2000, mirroring developments in Figure 1. But though inequality between countries has declined since 2000, the inequality within national borders has increased extensively. Accounting for these divergent trends between and within borders, the exact conclusion to whether the system has supported lower or higher inequality between all citizens around the world is inconclusive, even since 2000.

One great success attributed to the modern system has been the decline in global poverty over the past three decades, concurrent with market liberalizations. In low and middle income countries, the poverty ratio at a $1.25 a day threshold has declined from 52% of the population in 1981 to 22% by 2008. At the higher $2.00 a day threshold, this ratio has declined from 70% in 1981 to 43% by 2008. However, the trends by region have been highly divergent and that decline has been most visibly rooted in China (Figure 2) – drawing the question as to whether it is globalization and liberalized markets that have supported poverty reduction or whether it has instead been intelligent statist policymaking in China and other East Asian countries. Likely, there is some truth to both cases.

Figure 2: Divergent Trends in Global Poverty Reduction

Poverty Ratio at $1.25 a Day, Purchasing Power Parity, By Region

Figure_2

Source: World Bank

And so, the record of the current pro-market economic system is mixed, with evidence to both successes and drawbacks. The conclusion cannot be so concise as to state that globalization has or has not worked. We live in a world that is more integrated than ever before, but global growth has slowed down, and volatility has increased. There has been an accelerated convergence since 2000, but very little convergence under the same global system between 1980 and 2000. There has been a decrease in inequality between countries since 2000, but an increase in inequality within countries. There has been a decline in poverty since 2000, but very much divergent across regions.

In addition, unconventional metrics to human welfare must too be evaluated. Modern studies into life satisfaction suggest that economic growth does not always have a positive impact on the happiness in societies past a certain basic threshold of income levels. The World Values Survey’s happiness indices have been virtually unchanged in many advanced societies despite continued advances in incomes (Figure 3). At high income levels, happiness has been shown to trend more in-line with relative income disparities than it has with absolute income. Were the goal of modern economics to be the improvement of lives, then should not this disconnect between income and well-being be quite central to today’s policy debate?

Figure 3: Happiness Unchanged in Many Advanced Societies

Mean Happiness in the United States, 1980 – 2006

Figure_3

Source: World Values Survey

Given the imperfections of the system, it is essential to think about how it might be improved. Can the dominant economic model be re-thought so as to better “raise all boats”? There is no question that a market-based approach modelled on the United States and United Kingdom can support growth and higher incomes, innovation, and even global integration. But no system works well once taken to an extreme, and the present hyper-globalization model has proven inadequate for reducing income differences, preventing constant crises, enhancing well-being and presenting a sustainable economic plan to issues like anthropogenic climate change – each of these challenges can only truly be resolved via state intervention.

In re-thinking the model, what can we learn from alternative systems already in-practice elsewhere in the world? In East Asia, progress over the past decades has shown the strongest economic transition in human history, with an expanding middle class and rapid industrialization; a strong state has supported the economic revolution via targeted policies and long-term plans. In Europe, a system that stresses social equity and sustainability in addition to economic prosperity has established amongst the lowest inequality in the world, and internalized life satisfaction and environmental protection into policymaking.

To build a better tomorrow, what lessons can we draw from these alternative systems?

More Information:

Robert Hunter Wade, Chapter 12: “Globalization, Growth, Poverty, Inequality, Resentment and Imperialism”, 3rd Edition of John Ravenhill’s Global Political Economy (2011)

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