The report, titled Poorer than their Parents? Flat or Falling incomes in advanced economies, says that 97% of the population in Italy, 81% of the population in the US, 70% in the UK and the Netherlands and 63% in France saw flat or falling incomes between 2005 and 2014. Photo: Bloomberg
The report, titled Poorer than their Parents? Flat or Falling incomes in advanced economies, says that 97% of the population in Italy, 81% of the population in the US, 70% in the UK and the Netherlands and 63% in France saw flat or falling incomes between 2005 and 2014. Photo: Bloomberg

Falling incomes, rising Trump

The backlash against globalization has begun in the developed economies. Buying off the masses won't be easy this time

What explains the astonishing rise of Donald Trump in the US? Why did Brexit happen? Why is the far right gaining in Europe? These questions may have one common answer: the fact that between 65% and 70% of households in 25 advanced economies saw their incomes either fall or remain flat between 2005 and 2014. And this is not what some left-wing publication, or bleeding heart non-profit, is saying, nor is it a document from the International Labour Organisation, but it’s the startling conclusion of a report brought out by the McKinsey Global Institute this month. The report, titled Poorer than their Parents? Flat or Falling incomes in advanced economies, says that 97% of the population in Italy, 81% of the population in the US, 70% in the UK and the Netherlands and 63% in France saw flat or falling incomes between 2005 and 2014. Small wonder they vote for a comedian in Italy, for Trump in the US, for Boris Johnson and Nigel Farage in the UK and the National Front in France.

What’s more, the report says that in the worst-case scenario, 70-80% of income groups might not see higher incomes in the coming decade. They point out the political implications: “Our survey also found that those who were not advancing and not hopeful about the future were more likely… to support nationalist political parties such as France’s National Front or, in the United Kingdom, to support the move to leave the European Union." These groups believed that the influx of foreign goods and services were leading to job losses, and were far more likely to be against immigrants.

How likely is it these pernicious trends will be sustained? Even under McKinsey Global Institute’s high growth, high productivity scenario, incomes could be falling for 10-20% of income segments in advanced economies, which is still 5-10 times the pre-2005 level. The report warns we’re likely to see more job losses due to the disruptive effects of technology, so the 10-20% is an understatement.

At least so far there are few signs of any acceleration in growth. This is a structural crisis, the kind the global economy experienced in the 1930s during the Great Depression and in the 1970s when the Bretton Woods arrangement broke down. A structural crisis, as the earlier examples demonstrated, needs a structural change in the economy. For example, the Depression was followed by the welfare state and the sharing of the surplus with workers in the advanced economies. The 1970s crisis led to privatisation, globalization and free movement of capital. A new regime of accumulation is needed to power the global economy. But we have seen few signs of such change so far. Where, then, is growth to come from? Will it be the same debt-fuelled growth that led to the previous boom and bust? In its latest Annual Report, published less than a month ago, the Bank for International Settlements warned of “productivity growth that is unusually low, casting a shadow over future improvements in living standards; global debt levels that are historically high, raising financial stability risks; and a room for policy manoeuvre that is remarkably narrow, leaving the global economy highly exposed."

In short, it’s very likely the current trends may continue. The elephant in the room is globalization. As the McKinsey Global Institute study says, between 1980 and 2010, 85 million workers in emerging economies joined the labour force in export-related activities, competing with hitherto protected workers in the advanced economies. It says: “The declining ability of labour to protect its share of national income, and of middle and lower income segments to protect their share of the wage pool, reduced real median disposable income growth by nine percentage points in the US in the 1993-2005 period and by seven points in the 2005-14 period."

The report says the income of the rich, too, has been affected due to lower investment income. But elites with higher skills have been the least hit, seen in the way London voted to remain. The difference in the advanced economies between those who have been able to benefit from globalization and those who haven’t is stark, seen clearly in the Brexit vote.

At the other end are the developing countries that have profited immensely from globalization. Not only has it lifted hundreds of millions out of poverty, but all segments of the population gained, albeit in varying degrees. No wonder emerging market governments are eager to plug into global circuits of accumulation. The question is: is the globalization momentum slowing down? Analysts have flagged slower growth in global supply chains, automation and more onshoring of work in the US. Media reports speak of a fall in hiring of engineers by India’s top IT firms. If globalization does slow down, the road to prosperity for developing economies, typically paved by export-led growth, will become narrower.

The backlash against globalization has begun in the developed economies. Buying off the masses this time won’t be easy. Government balance sheets are stretched; global capital will swiftly punish any populist moves and fiscal expansion. Unconventional monetary policy is destroying pensions and exacerbating inequality. There’s a widening gulf between the aims of transnational capital and democracy. For the first time in many years globalization is facing a serious challenge. The only consolation is that the elites, both in the developed and developing countries, benefit handsomely from globalization and will fight tooth and nail for it. The question then could soon become: who is in the best position to discipline the restive masses? It’s worth remembering that in the 1930s, one response to the economic crisis was the rise of fascism.

Manas Chakravarty looks at trends and issues in the financial markets. Comments are welcome at capitalaccount@livemint.com

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