For more on the World Eco­nomic Fo­rum

The Star Early Edition - - BUSINESS REPORT - Tyler Cowen

PER­HAPS the most com­mon in­tel­lec­tual meme this week is the no­tion that “Davos Man” and the glob­al­ists have neglected the well-be­ing of the peo­ple and thus given rise to a hos­tile but some­what un­der­stand­able pop­ulism. The re­al­ity is that glob­al­i­sa­tion in­volves some sig­nif­i­cant self-lim­it­ing forces, and that many of its ma­jor prob­lems were headed to­ward so­lu­tions, even be­fore the vote for Brexit and the US elec­tion of Don­ald Trump.

Let’s con­sider some of the com­plaints in turn. One of the big­gest ob­jec­tions to re­cent glob­al­i­sa­tion is that it ex­tended in­ter­na­tional trade at a desta­bil­is­ing pace.

Whether or not you agree with this neg­a­tive as­sess­ment, from 1950 to 2008, in­ter­na­tional trade grew about three times faster than global gross do­mes­tic prod­uct (GDP). Since then, cross-coun­try trade has grown much more slowly, at about the pace of global GDP growth or per­haps slower. For bet­ter or worse, that is a sig­nif­i­cant de­cel­er­a­tion.

Elites didn’t just de­cide trade growth had to be slowed down. Rather, the ini­tial rapid growth had some self-re­vers­ing prop­er­ties built in. For in­stance, China’s growth and ex­ports slowed down as the econ­omy ma­tured and wages rose, trade-in­ten­sive Europe be­came a smaller per­cent­age of the global econ­omy, and pro­tec­tion­ist non-tar­iff pres­sures have re­cently been ris­ing.

The wis­dom be­hind glob­al­i­sa­tion isn’t a be­lief that it will be steered by very wise elites. Rather, most eco­nomic pro­cesses show el­e­ments of con­ver­gence, sta­bil­ity and mean-re­ver­sion, without any­one plan­ning them. It’s a com­mon metaphor of chaos the­ory that a sin­gle flap of a but­ter­fly’s wings may cause a hur­ri­cane on the other side of the world, but in the realm of eco­nomics the ana­logue hardly ever hap­pens. Sta­bil­ity is the norm, and most big events have fairly sig­nif­i­cant causes.

Or con­sider il­le­gal im­mi­gra­tion, another com­mon com­plaint among pop­ulists. There was a sig­nif­i­cant in­flux of un­doc­u­mented Mex­i­can work­ers dur­ing the Ge­orge W Bush ad­min­is­tra­tion. Since the Great Re­ces­sion, that flow of labour has ended, and there has been net neg­a­tive mi­gra­tion, namely more Mex­i­cans have re­turned to their home coun­try than have ar­rived in the US. Again, that is an ex­am­ple of a self-re­vers­ing process rather than de­lib­er­ate plan­ning by elites.

The refugee cri­sis in Europe has also taken some­what of a pause, for a va­ri­ety of rea­sons, in­clud­ing the deal with Turkey, the pa­trolling of the Mediter­ranean, in­ter­nal Euro­pean bar­ri­ers to cross-coun­try mi­gra­tion, and the dif­fi­culty the re­main­ing Syr­i­ans have in leav­ing. To some ex­tent

If an econ­omy stag­nates for long enough, but pos­sesses sig­nif­i­cant hu­man tal­ent, entrepreneurs will learn how to work around the con­straints in place.

this sit­u­a­tion was de­lib­er­ately planned and en­gi­neered by elites. I am not sure it should count as morally ac­cept­able, given the as­so­ci­ated hu­man suf­fer­ing. Still, if we are sim­ply ask­ing whether the po­lit­i­cal elites re­sponded to pop­u­lar de­mands to limit the num­ber of refugees mov­ing into the EU, they did.

Le­git­i­mate con­cern

Another big con­cern has been wage stag­na­tion. In the US at least, wage growth has picked up. The last labour mar­ket re­port showed av­er­age hourly earn­ings jumped 2.9 per­cent over the last 12 months. It is a per­fectly le­git­i­mate con­cern to won­der whether this will per­sist, but still there has been a labour mar­ket re­sponse.

One pos­si­ble self-lim­it­ing mech­a­nism is that, after enough years of wage stag­na­tion, some work­ers will take more pos­i­tive steps to im­prove their lot. Fur­ther­more, the growth of wages in China, rel­a­tive to the US, may make in­vest­ing in Amer­ica more prof­itable once again. In my view, the wage stag­na­tion prob­lem is hardly over, but at least progress can be seen.

Re­ports from the euro zone also in­di­cate that fi­nally a re­cov­ery is un­der way. This good news may also be frag­ile, but again it is a sign of a self-re­vers­ing process. If an econ­omy stag­nates for long enough, but pos­sesses sig­nif­i­cant hu­man tal­ent, entrepreneurs will learn how to work around the con­straints in place. Wages and prices will ad­just, if only through sub­tle changes in the qual­i­ties of jobs and work­ing con­di­tions; work­ers will be re-em­ployed; a re­cov­ery will take over. The slow path here is not the best one, but down­turns do not last for­ever.

Less than half a year ago, econ­o­mists were talk­ing about liq­uid­ity traps and long-term, de­mand-based sec­u­lar stag­na­tion. Now I hardly ever see those con­cepts in the pub­lic de­bate, be­cause the ev­i­dence for them largely has gone away. For that you can thank Davos Man, who de­fended the no­tion of a world or­der based on mod­er­at­ing and self-re­vers­ing pro­cesses.

I’m not say­ing all is well, as I see sig­nif­i­cant pos­si­bil­i­ties for in­sta­bil­ity in the cur­rent po­lit­i­cal con­fig­u­ra­tion. But the elites have in fact been work­ing at their job, and now it is up to vot­ers to catch up in their un­der­stand­ing. – Bloomberg

PHOTO: GCIS

Many of glob­al­i­sa­tion’s ma­jor prob­lems were headed to­ward so­lu­tions of their own ac­cord, even be­fore the vote for the UK to leave the EU and Don­ald Trump’s US elec­tion vic­tory, claims the au­thor.

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