Taking shots at globalisation is cheap but wrong

English original of article published on February 17 in Italian by La Stampa, following Mario Draghi's speech at the National Association for Business Economics on February 15

So we now know that it is both fashionable and acceptable to criticise globalisation, for even Mario Draghi is doing it. In his speech in the United States to a prestigious economics association, he joined all the many much less expert voices who are blaming populism and illiberal trends in western democracies on the effects of globalisation. But this is not quite right, as he ought to know.

Giving a speech in the land of President Joe Biden’s protectionist industrial subsidies and of the threat of an even more protectionist Donald Trump in November’s election, it was undoubtedly correct to acknowledge some of the genuine social and economic problems that these illiberal, anti-trade policies are seeking to address. Yet is globalisation really to blame for those problems? As a good economist, Draghi must know that it is not.

The essence of the problem, he rightly said, is the growth both of income inequality and of job insecurity, which has led large numbers of middle and working class people to feel they have been “left behind”, in the United States but also in many European countries, and even Japan. This phenomenon has manifested itself in a declining share of “labour income”, as economists call it, or “wages” as normal people say, and a rising share of company profits.

This, however, is not the result of globalisation. Primarily, economic research tells us that it is the result of technology, the automation of manufacturing and more recently of services too. In addition, it is the result of government policies which have deliberately reduced welfare entitlements and have reduced the bargaining power of labour unions as well as removing protective regulations from labour markets.

Another way of looking at this is to say that as inequality and job insecurity increased during the 1990s and 2000s, governments should have been introducing measures to mitigate this trend. That is what had happened many times during the postwar decades: as competition and innovation threatened to divide society, public efforts were made to counter or at least soften those divisions. But during the 1990s and into the 21st Century, too many governments either failed to act to manage these impacts or introduced policies that made things worse.

The important question to ask is: why? One answer is probably that they didn’t understand what was happening until it was too late. Another is a traditional problem for democracies: powerful companies and groups of billionaire owners lobbied against policies to manage inequality and insecurity, often using their political donations to enforce their desires. Democracy was being bought, by big industrial and, now, especially technology companies.

What about globalisation, then? Draghi is correct to say that free trade can work properly and sustainably only when there are agreed rules to govern it and agreed methods to enforce those rules and to settle disputes. Yet the reason why the foundation of the World Trade Organisation in 1995 was celebrated was precisely the fact that under the WTO at last trade was going to be governed by a dispute settlement system, according to agreed rules.

When China joined the WTO and yet paid huge subsidies that did not follow those rules, this was clearly a problem, as Draghi said. The right question to ask is why other governments, including those of the United States and the European Union, did not enforce those rules. Was it, as some Americans claim and as Draghi hints in his speech, because they expected globalisation to turn China into a rule-obeying democracy? Or was the reason in fact a blend of complacency and, again, the pressure of powerful lobbies who wanted to make billions in the Chinese market?

The fact is that globalisation, and with it the general economic phenomenon that this fancy word glamourised, namely competition, is getting unfair and misleading criticism. The problem facing liberal democracies results from the failure of governments to take action to deal with inequality and insecurity, inaction that is entirely a domestic political matter, not one to do with trade, China or indeed globalisation.

Yes, as Draghi says, globalisation is changing, partly thanks to geopolitics and the war in Ukraine. But it is not going away. Plenty of countries are benefiting from new patterns of production and trade, including India, Indonesia and all of South-East Asia, which are now growing more rapidly than China. Capitalism is always inventive, and technology facilitates that inventiveness even further.

Where Western liberal democracies have a problem is in the distortion of their political systems by concentrated corporate power, but also in the high level of their public debts. With such high debts, and with ageing populations requiring more health care and social spending, they are going to find it hard to manage inequality and the impact of technology. That is where they need to find solutions. To blame globalisation serves to divert attention from the real problems. Which is why populists like to do so.