Inclusive capitalism must begin at home

G20 leaders need to change domestic rhetoric as well as policies
As befits a gathering deservedly known for having a high ratio of words to actions, the G20 wrapped up its meeting last weekend with a strong but ill-defined call to make globalisation and capitalism work for the good of all.

Malcolm Turnbull, the Australian prime minister, spoke of the need to “civilise capitalism”; Christine Lagarde, head of the International Monetary Fund, said that growth had been “too low for too long for too few”.

They were reflecting a concern that the insecurities wrought by globalisation, particularly trade and migration, were fuelling populist sentiment and with it a flight towards protectionism and xenophobia. But few universally applicable solutions were offered.
In a way, that is not surprising. Not only are such concerns largely limited to a set of rich countries, but the answers that they demand will vary from nation to nation. The globalisation of trade, technology and to some extent migration are widespread challenges, but there are no universal international solutions. The response to globalisation must begin at home.

To much of the world, the obsession with rising inequality and populism must look like western solipsism. Thanks to the rise of emerging markets, modern globalisation has produced the first worldwide fall in inequality since the west’s industrial revolution. There is little sign of a general shift towards populism across emerging markets, albeit many of them are starting off at a pretty high level.

Even within the rich countries, the links between trade, technology and migration on the one side, and inequality and populism on the other, are by no means clear. In the UK, for example, migration and the hollowing-out of traditional manufacturing have widely been cited as reasons for the Leave vote in the Brexit referendum. Yet income inequality in the UK has been pretty much flat since the early 1990s.

Still, the rise in inequality in many countries, in wealth as well as income, is incontrovertible.

The problem is that it usually has a lot more to do with technology than trade, and not much at all with immigration. Yet while politicians can address the latter two, they cannot do much about the first, unless they actually manage to ban automation or digitisation in their economies.

Moreover, the tools that bear directly on trade and movement of people, such as protectionism and strict limits on immigration, tend to do more harm than good. Protecting one sector exposed to international competition tends to reduce efficiency and redistribute the pain elsewhere.

Each country’s solution must be tailored to its own conditions and what is politically possible.

But there are some useful principles to bear in mind. Government policies towards the labour market are best directed at equipping workers for new occupations and cushioning the income impact of structural changes rather than trying to preserve all current jobs through stultifying regulation. Rather than blocking immigration, help should be directed at local areas absorbing large numbers of new migrants, to ease the social impact.

Complementing money and legislation must come a new honesty among politicians about the nature of the problem and what can be done. Promising massive import tariffs or a wall with Mexico is easy. Explaining that technology cannot be uninvented and that adjustment can be eased but not wished away is much harder.

The G20 did not and will not produce a universal model for inclusive capitalism. But raising the issue at an international level may encourage individual governments to think harder about what they can achieve at home.

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