Economic view: Globalisation, and other bugbears of our time

There is an increasingly modish view that the broad trends in the world economy are turning out to be bad for most of us. ''Globalisation'' - that ill-defined mix of free trade, new technology and deregulation - is enriching the few at the expense of the many. Or at least so say the increasingly vocal latter-day Luddites, most no doubt tapping out their polemics on their lap-top computers.

The populist case was eloquently made by US researcher Edward Luttwak in the Independent recently (6 May). He argued that free trade had helped America's computer industry become hugely successful, but at the cost of more than a million jobs in older manufacturing industries.

Exposing all of manufacturing to cheap Third World competition was too high a price to pay for making Microsoft successful, he suggested. The high-technology sector had not created as many attractive jobs as had been destroyed in traditional industries, leaving low-paid work such as retailing and waitressing the only alternative for many Americans. Globalisation has helped only a small elite.

"Turbo-charged capitalism rewards agility as much as competence, penalising ordinary working stiffs who cannot smartly jump to something better when their jobs are eliminated,'' Mr Luttwak charges.

These arguments clearly touch a nerve, and not just in the US. Factory closures have cut a painful swathe through all the industrialised economies.

The protectionist response, to slow the tide of globalisation by imposing bans or punitive tariffs on cheap imports of manufactures, is on the face of it quite attractive. Consumers would have to pay higher prices - but are cheap CD players more important than preserving jobs at home and halting the decline in workers' wages? Only a turbo-charged yuppie would dare answer yes.

The trouble with this plain common sense is that there is not much evidence for it. For one thing, the timing does not work. The loss of jobs in manufacturing in America and elsewhere dates back more than a quarter of a century.

Paul Krugman, an economist at Stanford University, estimates that only a small fraction of the job cuts in the US since the late 1970s can be explained by cheap Third World competition. The trade deficit in manufactures has been too small relative to the size of the economy to have had much impact.

The share of manufacturing output in GDP declined from 25 per cent in 1970 to 18.4 per cent in 1990. Professor Krugman calculates* that if trade had been in balance for those two decades, the share of manufacturing would still have fallen from 24.9 per cent to 19.2 per cent of GDP. The chart shows that trade has made some difference, but not enough to explain much of the loss of manufacturing output and jobs.

Besides, most US trade takes place with other industrialised economies. The weighted average wage of manufacturing workers in America's trading partners was 88 per cent of the US level in 1990. Imports from low-wage countries took almost as big a share of GDP in 1960 as in 1990 - 2.2 per cent versus 2.8 per cent.

This does not prove that foreign trade will not become a more important influence, but the shift away from manufacturing so far must have other explanations. Consumer demands have switched, for one thing: demand for services has grown, creating other types of work.

Nor have these mainly been the much-denigrated "hamburger flipping" jobs. A new study of job creation in America by the Council of Economic Advisers** shows that a majority of the 8.3 million net new jobs since the end of 1992 have been in industries paying above-median wages. Most were full- time. In contrast to Britain, the proportion of people in part-time work in the US has declined.

According to the annual detailed survey of firms by the Bureau of Labor Statistics, occupations in the top half of the wage distribution accounted for 70 per cent of the net employment growth in 1994 and 1995, while those in the top tenth produced a third of the employment growth.

The BLS has also forecast which occupations will show the fastest employment growth by 2005. They are home health aides and personal care aides - classic low-pay service jobs - followed directly by computer scientists and systems analysts.

The US is different from the other industrial economies in its success in creating new jobs. None of the others has seen job growth on any significant scale since about 1980, although the UK has done better recently. Other economists are now trying out the Krugman calculations on their own countries, all more open to trade than the US, to see if we in Europe can blame cheap Third World competition for our deindustrialisation.

So far, it seems not. Like the US, most other developed countries trade mainly with each other and, as a whole, have a trade surplus in manufactures with the developing world. The scale of past trade with developing countries does not look big enough to explain why employment in manufacturing has been falling for more than 25 years.

However, another clue lies in growing inequality in those countries with the least bad jobs records. US employment has grown spectacularly; so has its income inequality. Countries where the income distribution has barely changed have a significantly worse jobs record.

The UK has also seen an increase in wage inequality. In fact it is greater now than at the time of the Industrial Revolution, according to figures in a recent paper by Stephen Machin in the Oxford Review of Economic Policy. Average full-time earnings for men in the bottom tenth of manual jobs were 69 per cent of median earnings in 1886, but only 64 per cent in 1990. The top tenth of wage earners made 1.43 times the median a century ago, compared with 1.59 times the median in 1990.

The increase in inequality has what economists call a "fractal" quality: widening gaps wherever you look, within professions as well as between them. Stars in their field, whether it is stock market analysis or medicine, are paid far more compared with the average than in the past.

Protectionists say this is simply the other side of the jobs coin. Because there are no "proper" jobs, countries either have high unemployment or bad low-wage jobs. However, the phenomenon of changing income distribution points the finger at technology rather than trade.

The Industrial Revolution of the 19th century left real wages stagnant for 50 years but boosted the return to capital, the resource required for mechanisation. The evidence suggests that now the scarce resource is skill, and the return to human capital is rising. The demand for skilled labour has risen in all areas of the economy.

Perhaps it would be possible to hold back the tide of technical change by erecting tariff barriers that prevented high-technology industries from becoming successful, although it is hard to see how to put the genie back into the bottle. But it is hard to see how this would benefit anybody. It would reduce productivity and economic growth directly. It would invite retaliation and reduce exports. It would raise the prices paid by all consumers for imported goods. It would destroy jobs in the "new" industries - and, incidentally, keep computers out of the price bracket of ordinary workers.

It is a crucial public policy challenge to tackle unfairness in the distribution of jobs and incomes, and to cushion the impact of the changing industrial structure of our economies. Turning the clock back is not the way to do it.

Professor Krugman speculates that the unfairness will recede eventually. "The high-skill professions whose members have done so well during the last 20 years may turn out to be the modern counterpart of early 19th- century weavers, whose incomes soared after the mechanisation of spinning only to crash when the technological revolution reached their own craft." But machines will still not be able to do the really important things such as create a garden or bring up children.

Pop Internationalism by Paul Krugman, MIT Press pounds 14.95

Job Creation and Employment Opportunities, April 1996.