Challenge

The combination in time of some of the effects of the Great Recession/Eurozone crisis (2008-13) and an unequal rate of recovery among and within countries, along with the fairly rapid introduction of new task-automation technology, can give rise to a new type of divergence between and within mature and emergent economies. This could have an impact on the political stability of regimes through a growing sense of rage in the middle and lower-middle classes, which have seen their incomes and position decline in the process, and their upward progress challenged. The feeling of rage has already begun to translate into electoral results and policies.

Globalization has contributed to lift billions of people in the world out of poverty. The slower pace, or even reversal, of globalization could represent a negative shock for the developing world and for parts of some developed countries.

Significant studies (Branko Milanović 2016 a and 2016 b, the World Bank 2016, the International Labour Organisation 2016 and others) have quantified that inequality has fallen at a global level, (although much less leaving out China and the countries of the former Soviet Union) and a global middle class has seen the largest incomes increase in the 1998-2008 period. According to Milanovic, global inequality has decreased from 69 Gini points in 1988 to 64 Gini points in 2011.However, in theadvanced economies inequality has increased, and the middle classes (mid and low) are in decline, due in part to globalization, the effect of the Great Recession and the impact of skill-based technological change.

In a report appropriately titled “Poorer than their parents?”, McKinsey (2016) argued that real incomes in advanced economies between 2005 and 2014 had stagnated or fallen for 65%-70% of households, accounting for more than 540 million people. The report reaches the deeply disturbing conclusion that even a return to strong GDP growth may not eliminate the flat or falling trend as demographic and labour factors weigh on incomes.

There is also the problem of the self perception of the declining middle class, as a Gallup (Newport 2016) poll showed for the US, a tendency that is repeated in some other countries. At any rate, perceptions weigh as heavily as reality when it comes to the political impact of the major issue of the loss of social status in the West. As Dani Rodrik (2016), one of the first to draw attention to this contentious issue, writes, “the frustrations of the middle and lower classes today are rooted in the perception that political elites have placed the priorities of the global economy ahead of domestic needs. Addressing the discontent will require that this perception is reversed”. Historically, societies that have started to decline can take decisions that accelerate the decline. Protectionist reactions might go against the interests of the emerging economies, but also of the developed ones.

There is a growing consensus (Ortega, 2016) that this time the technological revolution will destroy more jobs than it will create in the short and medium terms, and generate more inequality even if the prices of products and services go down. The “share of occupations that could experience significant automation is actually higher in developing countries than in more advanced ones, where many of these jobs have already disappeared”, and this concerns around two thirds of all jobs, according to a report by UNCTAD,(2016). Similarly, in an analysis by Citi, Frey and Osborne (2015) foresee a greater impact on developing countries than on mature economies (computerization could destroy 57% of current jobs in the OCDE area, 47% in the US, 77% in China and 69% in India, in gross terms, even though in net term it will be lower with the creation of “new jobs”, that are not really quantifiable). The richer and more advanced countries are more resilient but, increasingly, more of the jobs affected are middle class. And not only working classes.

According to the International Labor Organization (2016), 40 million new jobs a year are needed just to keep up with the demographic growth of the world’s population and more than 300 million to achieve the Sustainable Development Goals for 2030. These benchmarks are in contradiction with the forecasts quoted above.

Providing an answer to this challenge will also improve the image and profile of globalization and the G20, which is increasingly becoming the target of anti-globalization movements and sentiment.

In sum, it is necessary to ensure that a protectionist backlash in advanced countries is avoided and that both advanced and emerging members of the G20 implement policies to reduce the negative impact of automation in employment, both in advanced and emerging economies. The OECD (2016), has concluded that “trade protectionism shelters some jobs, but worsens prospects and lowers well- being for many others. In many OECD countries, more than 25% of jobs depend on foreign demand”.

Elephant Curve by Branko Milanovic (2016a)

Apart from the data we have provided, the most important and significant chart is the so-called “Elephant Curve” provided by Branko Milanovic, first in 2012 that shows which segments of the global population saw a rise in real incomes from 1988 to 2008, reflected a general growth of middle classes, that has led to a global middle class. But the data stop in 2008 (he later, as said provided new data up to 2012), just when the Great Recession started that had a declassing effect on part of the middle classes of advanced economies.