Globalisation might be worsening inequality, but I’m OK with that

Anyone who knows me knows I’m difficult to anger. The surefire way to get me fired up, though, is to remind me about inequality: how much growing up poor, for example, can limit a person’s educational opportunities, housing security and their ability to climb out of poverty.

At the same time, I’m a big believer in globalisation: the breaking down of natural and human-made barriers between national economies and growing freedom of movement across national borders.

Credit: Matt Davidson

The explosion in trade and the movement of people and ideas across borders has yanked millions of people in developing countries out of poverty. And without it, I’d probably have grown up in the place that gave birth to Pokémon, sushi and bullet trains (which I think would have been pretty cool, but which my parents reckon may not have suited me).

But globalisation may have worsened inequality in some ways, especially in advanced economies such as Australia, the US and Britain over the past few decades. So, how do I reconcile my passion for a more equal society with the benefits of a more globalised world?

First, it’s important to look at exactly how globalisation has tipped the scale when it comes to equality. The World Inequality Database, which keeps an eye on the ultrarich, suggests while inequality between countries has dipped, inequality inside countries might have gone the opposite way.

Why is this? Because when countries trade with each other, they tend to export the things they are good at making or, more accurately, the things they can produce at low opportunity cost. On the other hand, they tend to import the things they are worse at making, or which are taking away resources from things they could produce with less resources.

For example, since Australia has a lot of farmland, as well as metals and fossil fuels buried across the country, it has made more sense to put our effort and our resources into farming and mining, rather than something we’re not so good at such as building cars. A country like Japan, meanwhile, has a tiny amount of land compared with Australia, and has excelled instead in manufacturing cars, computers and cameras. By trading with each other, the two countries can specialise in producing what they are good at, buying the things that cost more for them to produce, from one another.

But when countries open up their economies to trade, it leaves some people within their borders worse off. That’s because there are some workers, in the industries which are less efficient, who lose their jobs when we start importing the products they were making from overseas. Of course they might be able to shift into the sectors in which we would be ramping up production, but that can take time as workers need to re-train and relocate.

There’s also been a bias towards skilled workers as technological progress has taken hold. Those in skilled jobs – who are more likely to be higher income earners – have had their value (and therefore their incomes) rise, while less skilled workers in countries such as Australia, the US and Britain, have seen their jobs shift overseas to places with cheaper workers such as China and India.

That’s the theory, and it’s backed by data ... for the most part. But some of that data has recently been interrogated. Economists at Columbia University and the US Federal Reserve have found poor people who move up in the ladder are more likely to understate their income than those in higher income brackets. That’s not because they’re bad people. It’s because as a poor person becomes richer (moving from subsistence farming to owning a small business for example), their income streams become more complicated, and they have more of an incentive to start fudging the numbers on their tax declarations.

And in Australia, the data shows both income and wealth inequality have remained relatively steady since 2007.

When we take this into account, inequality within countries has actually been falling on average, staying fairly constant since the 1990s. Of course, the jury is still out on the final answer, but there’s decent reason to squint our eyes at the conventional wisdom that globalisation has led to a widening of inequality within advanced economies.

But it’s not just income that we should be looking at when it comes to the impact of globalisation. A big benefit of trade is that consumers pay less. They also often get access to a wider range of goods. Consumers in Japan, for example, may get access to better quality and cheaper beef from Australia, while Australians have benefited from cheaper high-quality electronics from Japan.

If you’re looking for the numbers, reduced trade barriers have boosted the real incomes of the average Australian family by about $3900 a year, according to the Business Council of Australia. Shutting off trade would also have a disproportionate effect on lower-income earners. The poorest 10 per cent of income earners would see their purchasing power fall by 63 per cent, while those on high incomes would give up 28 per cent of their spending power.

It also means businesses that use certain ingredients, machinery or equipment to make their product or provide a service may benefit from being able to buy those inputs at lower prices, lowering their overall costs.

When it comes to consumption, globalisation is a clear win.

Globalisation also encompasses freer movement of people, information and ideas across national borders. This is a good thing because it means people have more choice when job hunting and companies have a larger talent pool to draw on. It also means innovative ideas and technologies can spread more easily across the world, improving the way we do things.

So, with all these benefits, why is there a clear movement against globalisation, and voters rallying to support populist politicians who want to shield their economies from its effects?

Consumers in Japan may get access to better quality and cheaper beef from Australia, while Australians have benefited from cheaper high-quality electronics from Japan.Credit: Bloomberg

There are undoubtedly some people who do end up worse off, or who are unable to adapt to the rapid changes that can rock an economy that is open to global ups and downs. But more importantly, there are also plenty of people who probably feel like they are going backwards, even if they are not, simply in comparison with those around them who may be reaching new heights of wealth.

Partly in response to this, and partly as a response to other countries taking the step, governments have embarked on ambitious spending programs to fatten up their domestic industries and keep, bring back, or increase manufacturing jobs in their own economies.

This “subsidy war” started with the US, which introduced the Inflation Reduction Act. Since then, China and Australia have followed, with the Future Made in Australia policy, which is full of tax incentives for products such as green hydrogen and cash directed at establishing new industries.

The latter in particular risks pouring money into industries which, like car manufacturing, end up on a ventilator of government hand outs and eventually the graveyard of Australian history.

Instead, we need to target help – including improved access to education, reskilling and upskilling programs, and even income support if needed – at the people left behind when we choose globalisation.

We also need to hear this loud and clear from mainstream politicians, instead of either dismissing displaced workers as a fringe issue or throwing globalisation out with the bathwater through protectionist policies. It’s not globalisation, but how we respond to it that will affect inequality in Australia over the long run.

Globalisation, like most things, comes at a cost. But the price of closing off our economy is greater. Globalisation might be worsening inequality in some countries, but until there’s conclusive evidence, it’s not enough to stand against the obvious gains.

Ross Gittins is on leave.

Read more:

• Ross Gittins: Australia’s caught in a spin cycle. Thank goodness you’ve got me to slow it down
• Comment: It’s defend yourself, or get crushed by China’s export tsunami
• Stephen Bartholomeusz: It’s D-Day for Europe’s trade relationship with China

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.