Globalisation benefits us and the majority of the world – but can it be tamed?

The evidence that globalisation has been beneficial for living standards in the developing world is overwhelming. The evidence is also strong that it has been economically beneficial for most people in high-income countries too

Those who wish to put globalisation in reverse misunderstand both its enormous benefits and the policy measures required to ensure those benefits are more equally shared

They say that when elephants fight the grass gets trampled. And when economists fight over elephants the complex reality can come off worse too.

A few years ago the World Bank economist Branko Milanovic produced a profoundly influential chart showing the change across the global income distribution (running from the poorest people on the planet to the very richest) over the past 30 or so years. The pattern was striking.

It appeared to show zero income growth at the very bottom, very strong growth for the lower middle and middle, zero growth again for those around three-quarters of the way up, and finally big increases right at the very top.

The lopsided shape of the chart’s line resembled the side profile of an elephant’s body and it became commonly known as “the elephant chart”. It was influential because the chart was seen by some as a visual distillation of the really big story of economic globalisation since the 1980s. “The chart that explains the world” was one common description.

The strong growth in the middle of the distribution was seen as a reflection of rapidly increasing prosperity in countries such as India, Brazil and, above all, China, as these states plugged themselves fully into global trade, investment and knowledge networks.

The growth at the top showed the rewards flowing to the planet’s economic elite. And the stagnating part of the distribution three-quarters of the way up was assumed to cover the working and middle classes of the West. The conclusion many drew was that while globalisation had been great news for the already rich and for people in the developing world, those in between – particularly the squeezed middle classes of Europe and America – were essentially excluded from the party.

But was this narrative right? The Resolution Foundation think tank last week produced an important piece of research that challenged this interpretation of the chart – and also the dynamics of globalisation that this narrative implies.

Adam Corlett of Resolution delved into the figures underlying the elephant chart and showed that population growth in China and the collapse in incomes in Russia after the collapse of the Soviet Union (rather than globalisation) were the major explanation for the zero recorded income growth of those in the upper middle of the distribution. An adjustment for population growth showed that those in the upper middle, including the middle classes of the West, did see positive income growth after all. It’s a useful clarification.

Yet there’s a danger that the findings could be spun – and some seem keen to do this – as a complete debunking of the idea that globalisation throws up serious economic and social challenges to Western countries.

The evidence that globalisation has been beneficial for living standards in the developing world is overwhelming. The evidence is also strong, as the Resolution work shows, that it has been economically beneficial for most people in high income countries too.

Yet globalisation also creates localised pockets of losers in developed countries. Think of the classic case of a steel plant being shut down in an American rust belt town and production relocated to China or somewhere else in Asia where labour is cheaper.

And globalisation obviously puts a rocket under the incomes of privileged people at the top, too. Think of footballers and rock stars who can sell their talents across vast global markets and also financiers who can attract enormous pools of capital to manage from all around the globe. Those forces certainly have implications for income inequality within Western countries.

Globalisation also requires painful and disruptive political trade-offs. The economist Dani Rodrik argues there is an inherent tension between deeper economic integration and the (full) preservation of national sovereignty and national democracy. Rodrik suggests history shows one can have two of these things but not all three simultaneously, something he describes as the “inescapable trilemma”.

This trilemma was made flesh by Brexit, and the struggle between those demanding a return of undiluted legislative control to Westminster and those pointing to the imperative of Britain remaining in the single market.

The chronic imbalances between saving and spending in various countries such as China, Germany and the US (and the resulting destabilising wave of cross-border financial flows) is another profound economic challenge thrown up by globalised trade. The 2008 financial cataclysm and the subsequent eurozone crisis were, to a significant extent, born of these imbalances.

Yet while globalisation does generate economic challenges and tensions, it is also often a convenient scapegoat for the outcome of domestic political choices. This is something the detail of the Resolution Foundation analysis also brings out well.

Average incomes in Western countries may not have been stagnant in the era of globalisation but, nevertheless, in some countries they have been extremely weak. And they have been much feebler in some states than others.

Similarly, the incomes of the top 1 per cent have soared in some countries such as the UK and America, but much less in others in Europe, even though they are all fully plugged into the globalised economy.

The lesson is that domestic policies such as the regulation of finance, corporate governance, minimum wages, top tax rates and redistributive welfare systems can mitigate the unequal impact of globalisation and ensure its fruits are broadly shared.

Globalisation presents challenges for the developed world – and the original elephant chart did help underline that. But domestic economic policy is far from impotent in the face of its lurches.

Donald Trump and many right-wing populists in Europe wish to put globalisation into reverse; they want to shoot the elephant. But that would ultimately be an act of gross self-harm. This beast can be tamed and its great power harnessed for the benefit of everyone.