Richard Florida
by Richard Florida
Fri Jun 22nd 2007 at 9:35am UTC

Rise of the Local

Global_2
Over at The Globalist (which I strongly recommend), Morgan Stanley’s Stephen Roach assesses the rise of local interests as backlash to globalization.

On the face of things, the world economy seems to be reaping the fruits of
globalization. However, Stephen Roach, chairman of Morgan Stanley Asia,
argues that rich countries are beginning to feel squeezed — which could
cause the collective interests of globalization to succumb to the
self-interests of “localization.”

The full story is here and after the jump. While you’re over on the Globalist site, check out this piece by Daniel Griswold on the benefits and costs of immigration. And this one providing a thumbnail history of American immigration


Globalist Perspective
>
Global Economy

From Globalization to Localization?

By Stephen S. Roach |
Tuesday, June 19, 2007

There
seems to be no stopping the powerful forces of globalization. Not only
has the world just completed four years of the strongest global growth
since the early 1970s, but in 2006, cross-border trade as a share of
world GDP pierced the 30% threshold for the first time ever.

The latter represents almost three times the portion prevailing
during the last global boom over 30 years ago. What a great testament
to the stunning successes of globalization!

New pressures

On another level, however, there are increasingly disquieting
signs. That’s because of a striking asymmetry in the benefits of
globalization. While living standards have improved

Unlike in Europe and Japan, in the United States real compensation has been going nowhere in a rising productivity climate.

in many segments of the developing world, a new set of pressures is bearing down on the rich countries of the developed world.

Most notably, an extraordinary squeeze on labor incomes has
occurred in the industrial world — an outcome that challenges the
fundamental premises of the so-called “win-win” models of
globalization.

Ricardian comparative advantage tells us that the first win goes
to low-wage workers in developing economies who enter the global
economy — initially through their involvement in export production —
and eventually as a new class of consumers.

Second win

The second win is presumed to benefit the rich nations of the
developed world — where consumers can expand their standard of living
by buying low-cost, high-quality goods from poor countries and where
workers can ultimately gain from being involved in the production of
more sophisticated products exported to increasingly prosperous
developing economies.

It is a great theory — but it’s not working as advertised. The
first win is hard to dispute. China has led the way, with more than a
quadrupling of its per capita GDP since the early 1990s.

Progress for developing countries

Other developing countries have

An
extraordinary squeeze on labor incomes has occurred in the industrial
world — challenging the fundamental premises of the so-called “win-win”
models of globalization.

lagged the Chinese experience but have still made considerable progress
in boosting living standards. India’s standard of living, for example,
has more than doubled during the past 15 years.

Moreover, according to IMF statistics, per capita GDP in Eastern
and Central Europe is likely to have expanded at a 3.6% average annual
rate in the decade ending 2007 — a dramatic acceleration from the 0.3%
pace of the prior ten-year period.

In the Middle East, a 2.7% trend in the growth of per capita
output in the decade ending 2007 would be nearly double the 1.5% pace
of the previous ten years.

Wins and losses

Developing Asia stands out from the rest of the pack, with a
6.2% average annual increase in per capita GDP estimated over the 1998
to 2007 period — little changed from the vigorous 6.3% trend over the
1988-97 interval.

Moreover, the first win hasn’t just gone to labor. Four years of
extraordinary returns for emerging market stocks and bonds underscore
impressive returns to capital, as well. The problem lies with the
second win — the supposed benefits accruing to the rich countries of
the developed world.

Following the United States

That’s where the going has gotten especially tough. Following
the example of the United States, in recent years, the benefits of the
second win in major industrialized countries have accrued

With
labor costs easily accounting for the largest portion of business
expenses, this has proved to be a veritable bonanza for the return to
capital.

primarily to the owners of capital — at the expense of the providers of labor.

At work is a powerful asymmetry in the impacts of globalization
on the world’s major industrial economies — namely, record highs in the
returns accruing to capital and record lows in the rewards going to
labor.

The global labor arbitrage has put unrelenting pressure on
employment and real wages in the high-cost developed world — resulting
in a compression of the labor income share down to a record low of
53.7% of industrial world national income in mid-2006.

Unequal benefits

With labor costs easily accounting for the largest portion of
business expenses, this has proved to be a veritable bonanza for the
return to capital — pushing the profits share of national income in the
major countries of the industrial world to historical highs of 15.6% in
the second quarter of 2006. This asymmetry in the second win is not
without very important consequences.

In days of yore — when labor and its organized unions actually
had bargaining power — the current squeeze on labor income in the
developed world would have undoubtedly resulted in some form of a
“worker backlash.”

Less bargaining power

In today’s increasingly globalized world, however, workers have no such power.

A
partial backtracking is probably now at hand, as the collective
interests of globalization succumb to the self-interests of
“localization.”

Declining union membership throughout the major economies of the
industrial world underscores the loss of labor’s bargaining power in an
era of globalization.

Union members as a proportion of employed wage and salary
workers has fallen dramatically since the early 1970s. Sharp declines
are evident in the United States, Europe, Japan and the United Kingdom
— with a modest drop in Canada being the only real outlier.

The United States stands out with a unionized sector that is
less than half the size of that evident elsewhere in the major
developed economies.

Political response

The political response in the United States deserves special
attention. Most importantly, it has not arisen out of thin air. Rather,
there are important macro-analytic reasons behind this backlash.

Unlike in Europe and Japan, where relatively stagnant real wages
have matched up quite closely with weak or declining productivity, in
the United States, real compensation has been going nowhere in a rising
productivity climate.

Change in beliefs

Over the five-year period from 2001 through 2005, real
compensation per hour in the non-farm business sector expanded at just
a 1.4% average annual rate — less

An
era of localization will have some very different characteristics from
recent trends: Wages could go up, and corporate profits could come
under pressure.

than half the 3.1% pace of trend productivity over this same period.

While we have been taught that, over time, workers are rewarded
in accordance with their marginal product, that most assuredly has not
been the case during the United States’ newfound productivity
renaissance.

Moreover, recent research has pointed up the inequity of the
so-called productivity dividend that has accrued to U.S. workers. These
issues were not lost in the 2006 mid-term elections in the United
States. Nor is the United States alone in tilting to the pro-labor
left.

Pro-labor politicians

Italy’s Prodi is pro-labor, and in Spain, Zapatero is certainly more sympathetic to the plight of labor than Aznar was.

Meanwhile, in Germany, Merkel has tilted increasingly toward
labor after she nearly lost the election running on a pro-market reform
agenda.

Focusing on the worker

Similarly, the Abe government in Japan has teamed up with the center-right in support of the “second

Declining
union membership throughout the major economies of the industrial world
underscores the loss of labor’s bargaining power in an era of
globalization.

chance
society” — attempting to make certain that the victims in the
rough-and-tumble arena of global competition are given the opportunity
to come back.

And in Australia, Kevin Rudd, the opposition leader, seems set to center his platform on the struggle of the average worker.

I fully realize it is heresy to challenge the greatest
mega-trend of our lifetime. So let me state categorically that I am not
heralding the demise of globalization. What I suspect is that a partial
backtracking is probably now at hand, as the collective interests of
globalization succumb to the self-interests of “localization.”

Different times

An era of localization will undoubtedly have some very different
characteristics from trends of the recent past. The most obvious: Wages
could go up and corporate profits could come under pressure.

But it also seems reasonable to expect increased regulatory
scrutiny of excess returns on capital — focusing, in particular, on the
perceptions of excess returns in financial markets (i.e., hedge funds
and private equity) as well as on the inequities of rewards at the
upper end of the income distribution (i.e., tax cuts for wealthy
citizens and the excesses of executive compensation).

No extremes

Moreover, localization taken to its extreme could also spell
heightened risks of protectionism — especially if the global economy
slows and unemployment starts to rise at some point in the 2007-08
period.

China has led the way, with more than a quadrupling of its per capita GDP since the early 1990s.

Under those circumstances, localization could ultimately give
rise to accelerating inflation, higher interest rates, greater
volatility in financial markets and a potentially vicious unwinding of
an over-extended credit cycle.

And, of course, the protectionist ramifications of localization
could prove equally challenging for the beneficiaries of
globalization’s first win: Dynamic new companies in the developing
world and the employment growth they generate.

No redeeming merit

Don’t confuse prognosis with advocacy. Many of these potential
developments, especially a drift toward protectionism, are without any
redeeming merit, in my view. But this is what happens when trends go to
extremes. In free-market systems, the pendulum of economic power then
invariably swings the other way.

An era of localization will undoubtedly have more frictions than
the unfettered strain of capitalism and globalization that has been so
dominant over the past decade.

The big question, in my view, pertains mainly to degree — how
far the pendulum swings from globalization to localization. The answer
rests with the body politic. The repercussions lie in economics and
financial markets.

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