Analysis of The Age of Perplexity: Rethinking the World We Knew (part 2)

Perplexity is the beginning of knowledge.

Khalil Gibran

Periods of both globalization and great technological acceleration have been recurrent throughout the history of human civilization, and these have both normally overlapped.

In this manner, the intense phase of globalization that took place immediately before this current one occurred in the latter decades of the nineteenth century and the first few years of the twentieth century, and was driven by steam, electricity, the internal combustion engine, telegraphy, and the telephone. It was a period of accelerated growth, only interrupted by World War I. This was why, after the war's end, John Maynard Keynes (1919, The Economic Consequences of the Peace) proposed returning to globalization in order to relaunch growth and consolidate peace.

However, the interwar period was a time of regression for globalization, marked by the Great Depression of 1929 and the protectionist and nationalist reactions caused by it. But, after World War II, the globalization process restarted again with great dynamism (continuing, to a great extent, Keynes's ideas), and this also coincided with the information revolution, that started in the 1950s and which has seen exponential growth since then.

The second half of the 20th century and the first few years of the 21st century have seen unprecedented global expansion. The increase in productivity has made it possible to support rapid growth of the global population from less than 2.5 billion in 1945 to 7.8 billion at present. And all this with unparalleled improvement in living conditions.

The World Bank measures global extreme poverty by counting the number of people that live on less than USD 1.90. In 1945, more than two-thirds of the world population was under this threshold, that is more than 1.6 billion people who lived in conditions of extreme poverty (Gonzales, F., 2018, Age of Perplexity, p. 11) . Today, even factoring in the effects of the COVID 19 crisis, the World Bank estimates that in 2020, 40 to 60 million people live in extreme poverty, about 9% of the world population (The World Bank).

This encouraging trend has increased in the last few decades. The proportion of those in extreme poverty with respect to the global population has been decreasing, although slowly, since the beginning of the nineteenth century, but its absolute number still grew until the 1970s. Since then, not only the proportion but the number of people living in extreme poverty has been falling at a quicker pace since the 1990s. In 1990, those in extreme poverty accounted for 35% of the world population some 1.5 billion people.

Globalization and technological advance have been the main driving force behind this progress. And recently another not entirely independent factor has also played a significant role; the strengthening of institutions in many emerging nations, with the consolidation of more stable and reliable political, legal, and economic structures, and the spread of the free market.

As a result, emerging countries, especially in Asia, have undergone an unprecedented leap in their development, leading and driving world growth.

The growth in developed countries from the end of World War II has been lower than that in the emerging countries. But nevertheless extraordinary in historical terms.

In countries such as the United States and the United Kingdom, that are very technologically advanced, and have been the principal actors in the current wave of globalization, GDP per capita has multiplied by 7.5 in the United States and 5.7 in the United Kingdom since the beginning of the 20th century. At the same time, standard working hours have dropped from 55 to 60 per week to some 40 per week currently (Age of Perplexity, p. 12).

That is to say, globalization and the technological progress have entailed dynamic increases in production, income, and employment, with clear Improvements in working conditions. Other contemporary analyses, which compared economies with varying degrees of technological advance and digitalization see (Gregory, 2016, The Natures of War) did not show that higher automation implies higher unemployment rates.

Undoubtedly though, there are still hundreds of millions of people that live in extreme poverty in the world, and billions of people whose living conditions are very unsatisfactory. A good number of countries, especially in Africa, have been left out of this wave of prosperity. But overall, the course of the global economy in the last decade does not warrant a growing insecurity, frustration and pessimism seen particularly in developed countries.

To explain this, we must resort to a combination of truth and fears, the fear is being partly generated by the pessimistic extrapolation towards the future of some of these truths.

Undoubtedly, A key factor has been the global economic crisis, which started back in 2008, and its consequences, such as the increase in unemployment, the damage inflicted on public accounts and austerity policies. The adjustments to social policies have had an especially significant impact on the population of developed countries, which is more protected and aging rapidly. The doubts surrounding the sustainability of the welfare state, which already came to surface in previous decades, have become exacerbated after the crisis.

And the insecurity caused by this has worsened due to a combination of other factors. Immigrants have frequently been considered a cheap workforce that competes unfairly against locals for jobs, keeping wages low, overloading social services and increasing their cost. And, also, the accelerated eastwards shift of the global economy, towards the large emerging countries that have been growing more quickly in the last few years.

Twenty-five years ago, the developed economies represented approximately 60% of the global GDP and terms of purchasing power parity (PPP); and the emerging economies the remaining 40%. In 2017, the proportions are the reverse: The emerging economies represent a little more than 60% of the global GDP, and the developed hardly reach 40%. In terms of the PPP, the Chinese economy is now larger than that of the United States. Even when assessed using market exchange rates, the emerging economies represent almost 45% of world GDP, and now, taken together, China (14%) And India (6%) almost reach that of the United States (22%) (Perplexity, p. 12).

According to all predictions, this process will continue until 2050, when the average annual growth of emerging countries will approximately double that of developed countries. China will overtake the United States as the largest world economy around 2030, and India will achieve that in around 2050. By then, six of the seven largest world economies will belong to emergent countries: Indonesia, Brazil, and Mexico will overtake Germany and Japan, and Turkey will overtake Italy. The whole of Europe will represent less than 10% of global GDP (pp. 12-13).

This swift loss of prominence of the developed countries in the global economy has reduced their political influence, and has affected their collective psychology, contributing to the sensation of decline and greater pessimism. But, surely, the fear of the effects of globalization and the technological change on labor markets is even more significant.

Globalism has particularly affected the manufacturing sectors, which have to a large extent been moved to emerging countries with lower labor costs. As for automation and digitalization, they have made routine and repetitive jobs redundant.

Conversely, jobs in the service sector, many of them being low-skilled with low wages (and for which most immigrants also compete) are more difficult to automate (Autor and Solomons, 2017, Does Productivity Growth Threaten Employment?), and the very high skill jobs, that are more abstract and less routine, have both increased. On the other hand, labor market instability and hire job rotation has generated a growing proportion of part-time, temporary or self-employed jobs, and this has been dubbed the "gig economy."

The weakness of the rise in wages in developed countries has been one of the more clearly substantiated effects of globalization and technological progress.

According to the Organization for Economic Co-Operation and Development (OECD), the real average income of families in the United States, Germany, Japan, Italy and France has grown by less than 1% per year from the mid-1980s to 2008. This data contrast with the previous decades that followed World War II, and the situation has worsened, in general terms, since the global financial crisis.

Lastly, the significant increases in productivity and economies of scale and network produced in the most digitalized sectors have given rise to a great accumulation of wealth and income in small, concentrated sectors of the population.

All this has very substantial implications on global income distribution, which are summarized very well in Branko Milanovic's (2016, Global Inequality) "Elephant Chart."

In this chart we see the real income accumulated growth of the population of 20 developed and emerging countries arranged according to income percentiles between 1988 to 2008. 

The average of the real increase in income is 25%, but the curves that give the chart its elephant shape tell us that the distribution was very uneven: those that came off better in the two decades were the ones that are, on the one hand, between percentiles 10 and 70, and on the other hand the ones above percentile 95 (especially percentile 99). However, the lowest percentiles (below 10%) and the higher ones (between percentiles 70 and 90) have had much lower increases in real income (close to 0 for certain segments). 

This is to say, the winner in these two decades of globalization and technological progress are the wealthy, both in developed and emerging countries, working women and the new middle classes, mainly in India and China. Conversely, the losers have been mainly the poorest among the poor in sub-Saharan Africa, the lower and middle classes in developed countries and in many of the nations of the old communist bloc.

In conclusion, the global economy has had a very favorable evolution since the mid-twentieth century. Nevertheless, the depressing effect of the financial crisis and of the subsequent austerity policies, wage stagnation, and the increase in inequality in developed countries, and, also, the greater global geopolitical instability, that has triggered flows of immigration, have augmented a body of opinion that is against globalization, and which is very distrustful about the effects of the technological revolution, especially regarding employment. All this has meant, in the political scenario, a consolidation of defensive, nationalistic, and protectionist trends. 

*Main Source: Gonzalez, F., 2018, The Age of Perplexity, pp. 11-16*

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