The Spigot of Global Growth

The rise of a global middle class, particularly in India and China, is not sustainable if it means the demotion of the American middle class—the core of the consumption engine which has pulled 450 million people out of extreme poverty since 1990 by sucking up the exports they produce.

Though globalization has tamped down inflation in the US by making electronics, clothing and sneakers cheaper, American corporations have claimed competitive pressure from the rising economies—real and concocted—as the reason for slashing health and pension benefits for employees at home. Soaring costs in the non-tradeable sector—health, housing and college tuition—have at the same time added further anxiety to middle class woes.

The result has been a pervasive sense of insecurity as well as rapidly increasing inequality between the winners and losers of globalization accompanied by technological change.

Most analysts credit cuts in benefits for employees for the current surge in corporate earnings. According to national income statistics gathered this year by the US Commerce Department, corporate earnings rose to 10.7 per cent of gross domestic income in the third quarter of 2006, the highest share since the 1960s, up 6.2% since 2000. At the same time, total labor earnings dropped to 56.4 per cent of gross domestic income from 58.4 per cent in 2000, continuing a slow decline since the 1980s.

These trends are worrying because the economic anxiety of the American middle class could easily turn toward protectionism if globalization is seen as the culprit, shutting off the spigot of growth for China, India and elsewhere.

This seems little understood in Asia. At every stop on a recent trip to Taiwan, Japan and China my interlocutors lamented the Democratic sweep in Congress. For them, the Republicans have meant free trade and Asian prosperity; the Democrats have meant the specter of economic populism and protectionism.

Such a point of view is shortsighted. In the first place, Bill Clinton largely transformed the Democratic Party away from its fear of trade. He shepherded NAFTA through Congress and laid the groundwork for China’s entry into the WTO. In the last presidential primaries, protectionist Democrats such as Richard Gephardt went down to easy defeat. This time around all the major candidates or potential candidates on the Democratic side—Hillary Clinton, Al Gore and Barack Obama—are centrists on trade.

Second, it is precisely the Democratic focus on universal health care, reliable pensions and reduction of college costs that promises to relieve the middle class anxieties that would sink globalization. The great economic lesson of our time is that an effective national safety net and public investment, especially in educating a highly skilled population, is the precondition for benefitting from global free trade.

The paradox, as the successful Scandinavian model has illustrated, is that social security enables flexibility and openness to change, not undermines it. The counterintuitive reality is that a simple anti-tax, anti-government, free enterprise agenda will bring globalization down, not sustain it.

This is not some kind of Democratic endorsement. It is a statement about the policy imperatives of coping with the reality that globalization inexorably creates losers as well as winners. If America is to remain the land of opportunity where all comers can join the vast, prosperous middle class that buys up what the rest of the world produces, old political allegiances and definitions will have to be transformed all around.

Until they reach a level of prosperity in which their own consumers are rich enough to buy most of what they produce, the prospects of the rising economies are tied to whether America can find a way to make sure globalization works for its middle class.

The stakes are high. If managed properly, our age of globalization can undo the Biblical adage that “the poor will always be with us.” By 2030, “countries as diverse as China, Mexico and Turkey could have average living standards roughly comparable to Spain today,” Francois Bourguignon, the World Bank’s chief economist, reports. “And the number of people living on less than $1 a day could fall by half from 1.1 billion today to 550 million, even while the world’s population increases by 1.5 billion.”

Abraham Lowenthal, the founding president of the Pacific Council on International Policy, has coined the perceptive phrase “intermestic” to dispel the misleading division between domestic and international realities which no longer applies. We are now all so intertwined that the course of American domestic politics will have a direct impact on the livelihoods of Shanghai garment workers and Bangalore software engineers, and vice versa. That needs to be understood not only in America, but Asia as well.

Nathan Gardels, editor