by Andrew Chrismer, Lead Editor, EACC Insights
What can we make of the state of the global economy today? Who controls it’s many levers, and how can it be regulated or deregulated in a world trade order ever more clouded by protectionism and trade-skepticism? The transatlantic community is dealing with tariffs and redefining friends and foes. Meanwhile, Britain prepares for Brexit and a potential hard landing out of the single market. The tenets of global trade policy set up over the previous several decades have been deemed, by some, the culprit of the injustices suffered by the working classes in the EU and the US. But how did we get here, and what, if any, warning signs did we miss?
Why are so many working class people turning toward protectionism and against the ideas of global trade when experts and leaders insist that global trade and the system in place has created more jobs and higher wages for the majority of people? Perhaps those who control the system, in governments and increasingly those who run multinational enterprises, the keepers of the keys of the global economy, are, at least in some measure, simply out of touch with the reality of what is going on.
A major facet of the this rising discontent could be the consolidation of financial and regulatory power at the top rungs of the economy. In her 1991 book The Retreat of the State, economist Susan Strange hypothesized a future where the apparatus of a state, governed by citizens, waned in favor of more power and influence over economies from multi-national corporations such as banks and other financial institutions, consulting firms, and major firms in services and manufacturing with various stakes in the global supply chain. Strange imagined a world where firms, not governments, would pull the levers on global market rules and oversight bodies, and a global economy where this power would shift from state control to control by a narrow few private actors. Strange furthers her argument by adding that the consolidation of governance towards a more disconnected elite within this system would lead to unrest from the public and ultimately market failures.
In 2018, some of Strange’s predictions can be seen in the data: the value of global exports have increased by $18 trillion from 1990 to 2017, yet multinational corporations account for 80 percent of that $20 trillion in global trade today. Global supply chains are crucial to the flow of products and materials across borders, but just a hand full of MNCs control 80 percent of these flows worldwide. Global finance has been consolidated to just five global custody banks, controlling nearly 60 percent of the world financial system. In regard to the global financing system in 1991, Strange warned of the power of the “big six” consulting firms having too much clout over accounting for these giants. In 2018, these six firms have consolidated further to just the “big four.”
Just recently, Apple hit a milestone of a $1 trillion valuation, with soaring stock prices and corporate earnings for huge technology companies known as the GAFA (Google, Apple, Facebook, Amazon) reaching record levels, and as the New York Times reports, governments and economists “are starting to look into whether the rise of so-called superstar firms is contributing to the lackluster wage growth, shrinking middle class and rising income inequality in the United States.” The system that has been created seems to increasingly be controlled by a narrowing number of actors, most of which are the leaders of private firms.
At the same time, conditions for the working class in both the EU and the US under this framework have stagnated or gotten more precarious. For manufacturing workers in the United States since 2000, real wages have stagnated, meaning the average manufacturing employee has not had a raise in two decades. In the European Union, income inequality is predicted to double by 2030, while wages are predicted to rise only slightly for working classes.
Perhaps these facts account for a least a partial explanation for why globalization and global trade have become dirty words in the public discourse. As we stare these facts in the face, the implications for global economic governance, and how these shifts will continue to impact markets and public opinion on globalization are being realized in real time. As Strange states in Retreat, “the much older term” for the global trade and financial systems, “interdependence, similarly hides the truth behind a persuasive euphemism for asymmetric dependence.” If this is true, and the levers of global capitalism rest mainly in asymmetric balance with those in ivory towers, detached from the real world of working classes and small enterprises, then due to this asymmetry, the scale at least in some part seems to tipping back the other way with populism’s rise. Are we observing a paradigm shift? In The Challenge of Global Capitalism, Robert Gilpin writes, “ certainly the future of the international economic and political system will be strongly affected by the relative success or the failure of the proponents or opponents of globalization.” A sea change in more than just sentiment seems all too certain in our current climate.
This exploratory note is merely an observation on the state of our global trading system, the winners and losers it has created, and the stress to which we see on its trusses. How did we get here, how do we move forward, and how can we revitalize the case for globalization given its increasingly obvious misgivings to certain populations? It’s upon our members to further this conversation in volume II of EACC Insights.