AngusADr Angus Armstrong, Director of Macroeconomic Research at NIESR and currently seeking nomination for Edinburgh South West, writes on the impact of globalisation, and argues that tackling inequality makes good economic sense.

 

Scottish Labour needs to show voters that it deserves their continued support in May’s General Election.

The stakes could not be higher. If recent polls are to be believed, Labour might no longer be the largest party in either the UK or Scottish parliaments. This would no doubt be used to justify a re-run of the referendum. More years of constitutional uncertainty would lead to a gradual erosion of Scotland’s economy.

To turn the tables, Scottish Labour needs a coherent economic plan that tackles the root cause of today’s challenges and resonates with voters as addressing the real issues the country faces.

These challenges have nothing to do with the border. It could be moved up or down, or even placed sideways, and the real economic and social issues facing Scots would not change in any way. Instead, the challenges have everything to do with the side effects of globalisation – in particular, its effects on inequality and those with fewer opportunities.

Globalisation is the greater integration of trade, people and ideas around the world as countries become more inter-connected. To be clear, globalisation offers enormous opportunities. It has lead to extraordinary advances in science and technology, greater interaction, and the extension of civil liberties for citizens from all over the world and enormous opportunities for more prosperity in both rich and lower income countries.

However, globalisation also raises challenges. One of its side effects is that it leads to greater inequality. When this is combined with very low social mobility, the outcome is generations of inequality and economic waste for those with fewer opportunities and, therefore, the country.

The cornerstone for understanding globalisation is David Ricardo’s remarkable insight of comparative advantage from two centuries ago. He showed how two countries can both benefit from trade, even though one country may be better at producing all goods than the other. These are the ‘gains from trade’. Another giant of economics, Paul Samuelson, showed fifty years ago that trade in goods is the same as the capital and labour embedded in the goods moving across borders. In other words, an open trade policy has the same immediate economic consequences as an open migration policy. And open borders create great prosperity for countries.

However, there is more to these theories than simply the gains from trade. They also have a lot to say about the distribution of income. At the same time that trade brings gains, it has a substantial effect on the distribution of income.

When a country with relatively more high-skilled workers, such as Scotland, trades with poorer countries that have relatively more low-skilled workers, Scotland’s low skilled lose out. Moreover, when the price of the exported good rises, the high-skilled workers can further gain at the expense of the low-skilled workers. Seventy years ago, Stolper and Samuelson showed that under certain conditions, these distributional consequences become magnified.

These effects on the distribution of income are more pronounced when they combine with limited social mobility. The inequality of one generation gets passed on to the next generation, usually through lost opportunities. The UK has the depressing distinction of being either the worst, or second worst, country in terms of economic and social mobility in the OECD club of advanced economies. This means that those children born into families at the bottom of the income distribution are very likely to still be at the bottom of the income distribution when they grow up.

The effects of income inequality can have a lasting, scarring effect in families, across generations, and even across regions if skills are not evenly distributed.

Education is one way of improving mobility, but this has not overcome the rigidities preventing children from escaping the circumstances of their parents. Indeed, social mobility appears to have fallen in recent decades. Therefore, the inequality from globalisation can have a magnified effect when combined with immobility. Not only is this bad for any sense of social justice, it is also economically wasteful and leaves the country poorer overall. As the income distribution becomes wider, the effects are felt beyond the current generation and into the next. Politicians may be reluctant to acknowledge this, but citizens can see the effects with their own eyes.

How much of the rise in inequality over the last two and a half decades can be traced to globalisation is hard to say with precision. But there are good grounds to think it may be substantial.

First, the near doubling of the global labour force from the integration of China, India and Brazil into the global economy has had a profound impact on world trade patterns. Second, the breaking up of the production chain means that many countries can be involved in producing the same good. And third, the pace of technological innovation has far outstripped governments’ ability to regulate.

Many international companies (especially banks) hold governments to ransom by threatening to relocate unless they enjoy tax cuts and light touch regulation. The global financial crisis is one example where the growth in cross-border finance far outstripped the capacity of regulators.

Being clear about the effects of globalisation on the income distribution is important to provide a coherent basis for a progressive economic plan. Political leaders seem to avoid these realities, perhaps weary of killing the golden goose. But the electorate see for themselves the consequences of combining inequality and immobility.

Moreover, if we are to continue to have public support for open borders it is necessary to accept and address some of the adverse consequences. Rather, the lack of acknowledgement and dealing with its side effects is a far greater risk to globalisation. The alternative is higher national and economic boundaries and economic stagnation that follows. To keep public support for globalisation, we have to address the unintended side effects.

Scottish Labour can be the party with a positive agenda to address the real challenges in our society. Policies aimed at redistribution can be justified as a counterweight to the widening income distribution as a result of globalisation, not simply a judgement about who is able to pay.

Helping those at the bottom of the income distribution is not just a moral issue; if this enhances economic opportunity, it also improves economic efficiency. It is good use of money. Only then will Scotland be guaranteed of supporting trade, migration and the free movement of ideas, which is the source of prosperity and necessary to afford a progressive social agenda. It is also how Scottish Labour can have a coherent economic plan to address the challenges Scotland faces.