TalkingEconomics: Globalisation in crisis

Having championed free trade, labour and capital flows the International Monetary Fund (IMF) and World Bank find themselves fighting against a wave of protectionism and moves to curb immigration.


Schroders Economics Team

The roots of discontent lie in weak wages and low productivity growth. The recurring theme of the recent meetings in Washington was how to redistribute the gains from globalisation in a more equitable manner.

The underlying roots of today’s backlash against globalisation are a lack of economic growth, falling real wages and increased job insecurity, in part created by new technology, rather than international trade itself.

Technology gains are not being recycled back into the economy

With the world economy growing at half the rate it did before the financial crisis, income growth is weak. Globalisation has also undoubtedly contributed to the weakness of real wages by increasing the supply of labour to the world economy.

However, there are other factors at play. New technology is a key factor, displacing workers with the increasing mechanisation of many manual tasks and more recently computerisation.

Although many are benefiting from new technology, people find it difficult to get back into work when their skills have become obsolete. This can result in a prolonged period of underemployment where they have to accept less attractive work, or unemployment where they became de-skilled and less employable.

The slowdown in productivity

However, the real root of the weak income growth is falling productivity. One reason productivity is declining despite technological advancement is that it is difficult to adequately capture the output of new technology-related products. For example, how do you measure the output of a smartphone when it is clearly so much more than just a phone?

Demographics is another possible cause of the loss of productivity: as the baby boomers head into retirement, the labour force is losing a large productive cohort of workers and it will take time to train up younger workers.

A loss of dynamism?

Another factor is the decline in dynamism in the economy. There is no single definition of dynamism but in a number of areas there is evidence of less activity and risk taking.

For example, job mobility in the US has fallen; people seem less willing to move either within an industry or geographically. There is also evidence of a persistent dispersion of high and low productivity firms. Normally a well functioning economy will move resources to the high productivity firms as the low performers fall by the wayside.

Better known as “creative destruction” the absence of this effect suggests that there is a tail of low productivity “zombie” firms that drag down aggregate productivity.

What will be the response?

The recurring theme of recent IMF meetings was the need to spread the benefits of globalisation more widely. Globalisation and trade are still seen as the best way to deliver prosperity, but it was acknowledged that more attention needs to be paid to those who are being left behind.

Unfortunately, there was no consensus on how to deliver this and until it gets worse there will not be the pressure to act.

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