The globalization scorecard

This is not a cheering time for economists – most of us – who favour trade as a means (a technology, if you like) for improving standards of living over time. For the first time in the life time of a middle-aged economist, trade wars at scale have replaced the progressively more open trading environment we grew up with. (And as Rebecca Harding and Jack Harding have written, trade literally seen as a weapon.) An obvious question is whether this political environment is an empirically reasonable backlash against globalization: has globalization – in the form of trade with lower income economies, or offshoring, or a labour replacing direction of technical change – caused income inequality within the western economies to an extent that made it ultimately politically unviable?

This is the question addressed by a short and accessible overview of the empirical literature by Elhanan Helpman, Globalization and Inequality. He surveys the work to date on each of these channels through which globalization might have led to (internal) inequality. (As Branko Milanovic, Francois Bourguignon and others have observed, globalization reduced inequality at the global level. It is the OECD income distribution that was skewed, especially in the US, and elsewhere especially in the 1980s.)

The conclusion is that at the aggregate level, none of the empirical studies can attribute much of the change in income distribution to the forces of globalization: “the surprising result is that rising inequality in recent decades has been predominantly driven by forces other than globalization.” As Helpman notes, aggregates are no comfort to individuals, and there have certainly been trade-related shocks to the jobs and incomes of certain groups of people and places. These localized shocks have contributed to the current political context. The book also ends with the unanswered questions: work to date has looked at the various channels separately, but what is their combined effect? what happens if you include also the effects of international migration, and capital flows? Such interactions might make the whole more than the sum of the parts.

Finally, there is the question of what policy lessons to draw from a vast amount of research? Different countries have responded to globalization shocks in different ways. Trade wars will immiserize everyone, but are there better responses and if so, what? How does the best response vary with context?

Inevitably, there is a lot the book doesn’t cover, including specific thorny issues in recent trade negotations (such as TRIPS, contentious areas of services etc). It sets itself a more tightly defined challenge, and it’s a nice, compact overview of what is and is not known, about the effect of globalization on inequality at the macro level within OECD countries, and the role of economic theory in understanding those processes.