- Protectionism is on the increase among developed nations
- The benefits of free-trade have been most evident in developing countries
- Short-term effects on financial markets may be reversed in the long run
- The net impact on global growth will be negative
The success of free-trade and globalisation has been a boon for less developed countries but, to judge by the behaviour of the developed world electorate of late, this has been at the expense of the poorer and less well educated peoples of the developed nations. Income inequality in the west has been a focus of considerable debate among economists. The “Elephant Chart” below being but one personification of this trend.
The elephant chart
If the graph looks familiar it’s because I last discussed this topic back in November 2016 in – Protectionism: which countries have room for fiscal expansion? This is what I said about the chart at that time:
What this chart reveals is that people earning between the 70th and 90th percentile have seen considerably less increase in income relative to their poor (and richer) peers. I imagine a similar chart up-dated to 2016 will show an even more pronounced decline in the fortunes of the lower paid workers of G7.
The unforeseen consequence to this incredible achievement – bringing so many of the world’s poor out of absolute poverty – has been to alienate many of the developed world’s poorer paid citizens. They have borne the brunt of globalisation without participating in much, if any, of the benefit.
It can be argued that this chart is not a fair representation of the reality in the west. This excellent video by Johan Norberg – Dead Wrong – The Elephant Graph – makes some important observations but, as a portfolio manager friend of mine reminded me recently, when considering human action one should not focus on absolute change in economic circumstances, but relative change. What did he mean by this? Well, let’s take income inequality: the rich are getting richer and the poor are…getting richer less quickly.
In the dismal science, as Carlyle once dubbed economics, we often take a half-empty view of the world. Take real average income. Since 2008 people have become worse-off as the chart below for the UK shows.
Wages and inflation
However, in the long-run we have become better-off for generations. What really drives prosperity, by which I mean our quality of life, is productivity gains: our ability to harness technology to improve the production of goods and services.
To read the entire report, please click on the PDF below.