With each passing year, globalization reaches new highs. The world continues to progress at a rapid rate. The benefits of globalization can be seen across all economies. Economists have been encouraging more trade and deeper global integration. However, the benefits of this progress are not distributed evenly across participants. From a global perspective, poverty and inequality have been declining in recent decades. But in specific countries, inequality continues to rise. Social instability stemming from deep rooted discontent is phenomenon which almost every country is seeing. Populist politicians with protectionist agendas are gaining popularity as they are able to tap into a large voter base that believes they have been treated unfairly.
Economists have spent significant time and resources looking into the relationship between globalization, technological progress, and growing inequality. These research efforts have significantly improved our understanding of the problem and the various underlying relationships. However, there has been little discussion on the potential solutions that could aid in bridging this gap. Now, more than ever, it is important to ensure that growth and globalization works for all. There are enough resources in terms of monetary and physical resources as well as data to ensure that growth and globalization become more inclusive.
Globalization encourages the free flow of goods & services, labor and capital; any form of integration refers to free mobility of these three. Certain challenges arising from these areas demand a detailed inquiry.
There has been a general increase in the speed of evolution of human societies. In previous times, a skill once acquired could serve you for a lifetime. As technology evolved, the pace at which human societies evolved suddenly accelerated. This has been so in the past few decades.
In the working lifetime of an individual, one must learn and unlearn many skills that have been acquired and adapt to new and changing times. While the private sector has training for those it hires, the ones that are fired are left to fend for themselves. The existing skill sets may not be enough or applicable anymore. While those who are relatively well off are able to invest in degrees and certifications, those who don’t have the financial means are left out. This is a major challenge in the labour area.
Another challenge is the policy of taxation. Taxation is one of the most important tools used by governments to reduce inequality and facilitate redistribution of wealth. But tax policies can also widen inequalities by means of unjust tax systems which allows things such as avoidance. As inequalities rise, the burden of social protection on the government increases. Social security programs require large sums of money. Thinking of revenue sources to finance social security programs without them being a burden on citizens is a major challenge.
Economic theory has always propagated the potential advantages of capital account liberalization. As international capital market channel world savings, the areas with capital deficiency will no longer face such challenges as capital can flow to the most productive opportunities across the world. This enables economic growth without putting pressure on domestic saving. While these benefits are real, so are the risks.
The link between financial globalization and economic growth isn’t as straightforward as economic theory lays it out to be. Different types of capital flows have different impact on the economy. Flows such as foreign direct investment boost long-run growth. However, the impact of other flows is dependent on a country specific factors such as institutions arrangements and policies.
It has been long established that free capital flows increase economic volatility and the frequency of crises in many emerging markets and developing economies. Dani Rodrik once said “boom-and-bust cycles are hardly a sideshow or a minor blemish in international capital flows; they are the main story”. Strengthening financial systems and improving their resilience are major challenges. Different economists have suggested different ways to acheive this. But none of these solutions can be implemented in isolation without considering other aspects — They aren’t easy to implement, nor are they achievable at minimal costs. But the cost of not implementing this could far outweigh the cost of these reforms and programs. The global economy could possibly be worse off without these solutions.
– Contributed by Bhargav
Picture Credits: global-economic-symposium.org