Bhagwati against the tide

January 4, 2007

There has been much talk about the distress of the Western middle classes in the current context of globalisation, said to put downward pressure on their incomes (more on this in my first post). Globalisation benefits the world’s richest, and the world’s poorest. But after having been accused of destroying the jobs of the West’s unskilled, it is now said to squeeze livelihoods of its oh-so important middle classes. Lawrence Summers in the FT launched the term “anxious middle” to talk about the current political climate. This Christmas I was offered a book on “Les classes moyennes à la dérive” by French sociologist Louis Chauvel. All this contributed to a melancholy mood in many economic circles and family discussions over Christmas. Yet, fortunately, there are much more upbeat notes to start the year with. For example, German unemployment declined sharply in 2006, it is official. It contributed to an unprecented and much talked-about optimistic middle-class pre-Christmas shopping binge.

I was starting to worry about the FT’s unusually wide coverage of the “anxious middle class” thesis when today I fell upon a comment published there by University of Columbia professor Jagdish Bhagwati entitled “Technology, not globalisation, is driving down wages”. Countering current arguments saying that the recent doubling of the global working population leads to lower bargaining power for Labour in its dealings with Capital, and the classic arguments that trade with or immigration from developing countries leads to a race to the bottom, he states: “Examine the common arguments linking globalisation to the distributional distress and little survives.”

According to Bhagwati

“The culprit is not globalisation but labour-saving technical change that puts pressure on the wages of the unskilled. Technical change prompts continual economies in the use of unskilled labour.

(…) I suspect that the answer lies in the intensity of displacement of unskilled labour by information technology-based change and in the fact that this process is continuous now – unlike discrete changes caused by past inventions such as the steam engine.

(…) The pressure on wages becomes relentless, lasting over longer periods than in earlier experience with unskilled labour-saving technical change. But this technical change, which proceeds like a tsunami, has nothing to do with globalisation.”

This comment is very welcome. Making an ill-defined and almost diabolic “globalisation” responsible for many in reality home-grown anxietes does not add much to sound policy-debates, it is just a vote-winner for current election candidates. Globalisation as understood here is, “a movement in direction of greater integration of economic activities, across borders, through markets” (Martin Worf). It is one thing. Technological change is another.

Yet, there is an important issue. One cannot quarantine technological change from globalisation. Globalisation-guru Martin Wolf, in his famous “Why Globalization Works” says that there are two main drivers for globalisation: policies and technology. What affects Western Middle classes, outsourcing of skill-intensive activity in IT or accounting to countries such as India cannot but be a result of technological progress. It is exactly this process that is at the heart of latest globalisation trends and controversies. With this technology-argument cries to ban imports of shoes and bras from China or Vietnam or to close borders to immigration risk being displaced by cries to halt technological progress or others of this deeply anti-modernist order.

We are in a Shumpeterian era of “creative destruction”, with technological progress at its heart. Today’s world reminds me a lot of Shumpeter’s account of the “capitalist civilization” in his “Capitalism, Socialism in Democracy” of the late 1930s nd early 1940s. He outlines the “social atmosphere” under capitalist conditions. It is one of growing hostility to the capitalist system as wealth grows, more critical minds develop and thrive in the form of the “intellectual” favoured by the libertarian “bourgeois”/capitalist order, and as workers who have voting power are periodically thrown out of work due to creative destruction and economic cycles. As capitalism spreads globally, resistance to it will also tend to grow and spread. Its benefits will continue to be taken for granted. And fear of economically successful globalisers such as China and India is set to stay until much more of ther respective billion plus inhabitants will have reached the ranks of the middle classes….

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