Globalization has left people behind. This is what we should do about it

Written by – Diane Coyle
Professor of Economics, University of Manchester

t’s recently become fashionable to worry that the fabric of democracy is being undermined as people feel left behind by globalization and automation. I think these fears are to some extent well founded. But this isn’t a new problem: it goes back at least as far as the 1980s. Our failure to recognize it then, and act on it since, is why it has now reached crisis proportions.

Are there lessons we could learn from those decades-long failures of policy? Yes. Will we learn them? Perhaps not, although there are a few promising signs.

The most fundamental lesson is that to address a problem, you first need to notice it. One of the striking features of the Brexit vote, and the response in some other places to various manifestations of rising populism, has been the surprise of many voters in wealthy, cosmopolitan cities at discovering how differently some of their fellow citizens are thinking.

These tend to be people living in towns and smaller cities where traditional jobs began to disappear a generation ago and have never been adequately replaced. Whole communities have experienced their real incomes stagnating or falling since well before the financial crisis.

A decade ago, Benjamin Friedman made the case in The Moral Consequences of Economic Growth that democracy requires a growing economy to lubricate the necessary give and take. When people see their own lives improving, they tend to be sanguine about others’ lives improving more quickly. However, when their own living standards have declined, and they expect their children’s to be even worse, resentment against others who are doing better is inevitable.

For at least three decades, since automation and globalization started radically changing industry, whole swathes of geography have been struggling even as economies have grown overall. For the most part, this has barely registered on policy-makers’ radars.

Statistics existed that could have alerted us to the brewing crisis – but nobody was looking. It took Thomas Piketty, in his 2014 work Capital, to put in the huge amount of effort necessary to make the data clearly tell the story of how many workers were being left behind.

But all Piketty has done is start the conversation: we still need to develop a serious policy response. It’s not too late to start doing what we should have been doing since the 1980s – essentially, taking regional policy much more seriously. I see three main elements to this:

Infrastructure

Large cities will always be the best incubators of economic growth, because the more people you have in one place, the easier it is for their knowledge to spread to each other. But we can narrow the natural disadvantage of smaller cities and towns by improving the infrastructure that connects them to each other.

This recommendation implies making fast broadband universal, but it also points to the need for better transport, like high-speed rail, because virtual and physical communication are complements, not substitutes.

Education

I claim no expertise in how we should be educating our children for the technological state of the world they will face when they graduate, but I am fairly certain we’re currently getting it wrong. Most schools still resemble factories for turning children into expensive and not very good computers.

One obvious and much discussed improvement would be teaching more coding – something we struggle with, partly because we don’t have enough teachers with the necessary skills. Another improvement would be to help children develop the human skills that machines seem furthest away from mastering, such as creativity in problem solving.

Devolved power

Every region is different in terms of what jobs it could create, and the kind of education it needs, which brings me to the final priority: giving local levels of government more power. If education policy is being set by a bureaucrat in a distant city, it can’t reasonably be expected to equip students with the appropriate skills for the local economy.

The same is true of other policy areas. One clear lesson of last year’s electoral shocks is how many people felt a lack of agency. They see decisions that shape their lives being taken by people who aren’t like them, in places that feel far away, whether in central banks, multinational boardrooms or booming capital cities, and seem disconnected from their hinterlands. During the UK referendum campaign the slogan that resonated most was the promise to “take back control”.

If part of what’s undermining democracy is people feeling disconnected from power, part of the answer must be looking for ways to return power closer to people.

Public sector investment and political will

All of this is easier said than done. It would require a very serious redirection of resources to create opportunities in the regions or towns that have been left behind – high quality education and infrastructure do not come cheap. In addition, the initiative needs to come from the public sector, because public capital is the only kind of capital people in left-behind regions can access.

Some may see this as unrealistic given current fiscal challenges, but the problem is less about resources than political will. Get serious about ending tax breaks for corporations and wealthy individuals and the money for investment could be found.

Technological change also presents opportunities to ameliorate the societal disruptions it is creating. The Fourth Industrial Revolution can improve everyone’s lives, if we govern it wisely.

There are some, tentative signs – in the UK, at least – that politicians may be starting to understand. It is encouraging to hear the phrase “industrial policy” being mentioned again. A new acronym is gaining currency, the “JAMs”, describing people who are “just about managing”. It may sound inelegant, but at least it helps to name the problem.

History shows that when a significant proportion of people feel pessimistic about the future, crises that might otherwise be manageable can quickly spiral out of control. We can’t afford to take several more decades to get policy right.

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Five leadership priorities for 2017

Written by Klaus Schwab, Founder and Executive Chairman, World Economic Forum
The views expressed in this article are those of the author alone and not the World Economic Forum.

As the past year has demonstrated, leaders must be responsive to the demands of the people who have entrusted them to lead, while also providing a vision and a way forward, so that people can imagine a better future.

True leadership in a complex, uncertain, and anxious world requires leaders to navigate with both a radar system and a compass. They must be receptive to signals that are constantly arriving from an ever-changing landscape, and they should be willing to make necessary adjustments; but they must never deviate from their true north, which is to say, a strong vision based on authentic values.

That is why the World Economic Forum has made Responsive and Responsible Leadership the theme for our annual January meeting in Davos. As leaders in government, business, and civil society chart a course for the next year, five key challenges will warrant their attention.

Firstly, they will have to come to grips with the Fourth Industrial Revolution, which is redefining entire industries, and creating new ones from scratch, owing to groundbreaking advances in artificial intelligence, robotics, the Internet of Things, self-driving vehicles, 3D-printing, nanotechnology, biotechnology, and quantum computing.

These technologies have only begun to show their full potential; in 2017, we will increasingly see what used to be science fiction become reality. But, while the Fourth Industrial Revolution could help us solve some of our most pressing problems, it is also dividing societies into those who embrace change and those who do not. And that threatens our wellbeing in ways that will have to be identified and addressed.

Secondly, leaders will have to build a dynamic, inclusive multi-stakeholder global-governance system. Todays’s economic, technological, environmental, and social challenges can be addressed only through global public-private collaboration; but our current framework for international cooperation was designed for the post-war era, when nation-states were the key actors.

At the same time, geopolitical shifts have made today’s world truly multipolar. As new global players bring new ideas about how to shape national systems and the international order, the existing order is becoming more fragile. So long as countries interact on the basis of shared interests, rather than shared values, the extent to which they will be able to cooperate will be limited. Moreover, non-state actors are now capable of disrupting national and global systems, not least through cyber attacks. To withstand this threat, countries cannot simply close themselves off. The only way forward is to make sure that globalization is benefiting everyone.

A third challenge for leaders will be to restore global economic growth. Permanently diminished growth translates into permanently lower living standards: with 5% annual growth, it takes just 14 years to double a country’s GDP; with 3% growth, it takes 24 years. If our current stagnation persists, our children and grandchildren might be worse off than their predecessors.

Even without today’s technologically driven structural unemployment, the global economy would have to create billions of jobs to accommodate a growing population, which is forecast to reach 9.7 billion by 2050, from 7.4 billion today. Thus, 2017 will be a year in which social inclusion and youth unemployment become critical global and national issues.

A fourth challenge will be to reform market capitalism, and to restore the compact between business and society. Free markets and globalization have improved living standards and lifted people out of poverty for decades. But their structural flaws – myopic short-termism, increasing wealth inequality, and cronyism – have fueled the political backlash of recent years, in turn highlighting the need to create permanent structures for balancing economic incentives with social wellbeing.

Finally, leaders will need to address the pervasive crisis in identity formation that has resulted from the erosion of traditional norms over the past two decades. Globalization has made the world smaller but more complex, and many people have lost confidence in institutions. Many people now fear for their future, and they are searching for shared but distinct beliefs that can furnish a sense of purpose and continuity.

Identity formation is not a rational process; it is deeply emotional and often characterized by high levels of anxiety, dissatisfaction, and anger. Politics is also driven by emotion: leaders attract votes not by addressing needs or presenting long-term visions, but rather by offering a sense of belonging, nostalgia for simpler times, or a return to national roots. We witnessed this in 2016, as populists made gains by fostering reactionary and extreme beliefs. Responsible leaders, for their part, must recognize people’s fears and anger as legitimate, while providing inspiration and constructive plans for building a better future.

But how? The world today seems to be engulfed in a sea of pessimism, negativity, and cynicism. And yet, we have an opportunity to lift millions more people out of poverty, so that they can lead healthier and more meaningful lives. And we have a duty to work together toward a greener, more inclusive, and peaceful world. Whether we succeed will not depend on some external event, but rather on the choices our leaders make.

The coming year will be a critical test for all stakeholders in global society. More than ever, we will need responsive and responsible leadership to address our collective challenges, and to restore people’s trust in institutions and in one another. We do not lack the means to make the world a better place. But to do so, we must look past our own narrow interests and attend to the interests of our global society.

That duty begins with our leaders, who must begin to engage in open dialogue and a common search for solutions to the five major challenges on the horizon. If they acknowledge that ours is a global community with a shared destiny, they will have made a first – albeit modest – step in the right direction.