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News : UK Economy Last Updated: Jan 9, 2015 - 5:28 AM

Globalization, the underclass and the need for a new model - Part 2
By Michael Hennigan, Finfacts founder and editor
Oct 20, 2014 - 8:17 AM

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In the second part of this series, we continue to look at globalization and its malcontents against a backdrop reported on Sunday by The Observer newspaper that Britain is on the verge of becoming permanently divided between tribes of haves and have-nots as the young increasingly miss out on the opportunities enjoyed by their parents’ generation.

As the chart here shows, "it is very rare for real wages in the UK to fall continually over a seven-year period. They have done so only three times in the past 150 years: after a deep recession in the late 19th century; in the 1930s, following the Great Depression; and again in the past seven years."


Globalization's new normal needs permanent underclass - Part 1

Globalization, technological change and GDP's disconnect - Part 3

Dani Rodrik a native of Turkey, an emerging economy, a former professor at Harvard and Columbia universities, and currently professor of Social Sciences at the Institute for Advanced Study in Princeton, New Jersey, is a leading writer/ researcher on globalization and development.

In his book, 'The Globalization Paradox: Why Global Markets, States, and Democracy Can't Coexist,' [free pdf version here] he argues that there is a 'trilemma': that we cannot simultaneously pursue democracy, national self-determination, and economic globalization. Give too much power to governments, and you have protectionism. Give markets too much freedom, and you have an unstable world economy with little social and political support from those it is supposed to help. Rodrik argues for smart globalization, not maximum globalization.

Since the dawn of the industrial revolution, manufacturing has been the main driver of growth from Great Britain's rise to China's manufacturing return as a significant world economy in recent times.

However, the spread of automation has reduced the potency of manufacturing and it has peaked in some developing economies.

Prof Rodrik in his blog summarised a talk he gave at a World Bank conference last week: "I argued that industrialization had pretty much run out of steam as a growth strategy, that services would need to be the focus going forward, and that this required in turn a different policy mindset about how to increase productivity. In particular, I argued that policies focusing on generating a sequence of sectoral 'winners,' which worked so well in manufacturing (garments to car seats to cars to electronics), would have much smaller payoff in services, in view of the non-tradability of most service segments.

I suggested further that, even under the best of circumstances, a services-oriented strategy would yield lower growth than what earlier episodes of rapid industrialization had produced. Here is the PowerPoint presentation with some background charts and analytical detail."

We wrote last January that "absolute economic convergence has been a mantra of policymakers in Europe for decades but it's generally a myth. The evidence shows that it is also an illusion in most emerging economies."

Economic convergence is a myth in Europe and in emerging economies

Last month the Economist wrote: "Ten years ago, developing economies were catching up with developed ones remarkably quickly. It was an aberration."

It said Dani Rodrik "points out that, over time, the share of employment in industry at any given stage of a country’s development has declined; middle-income economies today employ fewer people in manufacturing than did middle-income economies in the 1960s or 1980s. And the income level at which an economy typically enjoys the peak share of employment in industry has fallen by almost half.

While the manufacturing sectors of developing economies can quite often come to match the labour productivity of rich-world economies, the distance towards rich-world levels of wealth that an economy can travel simply by developing its manufacturing has been falling. With manufacturing as a proportion of the total economy peaking earlier and at a lower level, emerging economies can now find their catch-up more likely to stall at disappointingly low levels of income."

The rise of China has had a remarkable impact on every continent and its maturing is also having an impact.

Last week, Jean Tirole, the French winner of the 2014 Nobel Prize in economic sciences, told the France 24 news service: “We haven’t succeeded also in downsizing the state, which is an issue because we have a social model that I approve of – I’m very much in favour of this social model – but it won’t be sustainable if the state is too big.”

“We haven’t succeeded in France to undertake the labour market reforms that are similar to those in Germany, Scandinavia and so on,” the economist added in a telephone interview from the French city of Toulouse, where he works.

In an era of low growth, how will that help? - more in Part 3 on Tuesday.

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