Global business and political leaders gathered this week in Davos, Switzerland at the annual World Economic Forum (WEF) to discuss the negative impact globalization has had on the middle-class and the poor and how the Western model of capitalism has failed to right the course.
Many experts are worried about the steady decline of free market economies, which has yielded widespread social unrest, while countries employing state capitalism on the Chinese model continue to grow and prosper.
For the past two decades wages in the world’s leading democracies have stagnated while inequality has risen as a result of globalization shifting economic vitality from the developed to the developing world. The integration of billions of low-wage workers into the global economy coupled with productivity gains from technology, especially within the manufacturing sector, have left middle-class workers in advanced countries out in the cold.
In the U.S. the average household income has fallen by over ten percent over the past ten years while the wealth gap has widened. According to Charles Kupchan, professor of International Affairs at Georgetown, the U.S. is now “the most unequal country in the industrialized world.” Kupchan explains the root causes of the problem in a recent Foreign Affairs piece:
The primary source of the declining fortunes of the American worker is global competition; jobs have been heading overseas. In addition, many of the most competitive companies in the digital economy do not have long coattails. Facebook’s estimated value is around $70 billion, and it employs roughly 2,000 workers; compare this with General Motors, which is valued at $35 billion and has 77,000 employees in the United States and 208,000 worldwide. The wealth of the United States’ cutting-edge companies is not trickling down to the middle class.
This trend has bred discontent amongst the masses as the WEF’s 2012 Global Risks assessment released last week makes clear. The gains of globalization are at risk of being reversed by the “seeds of dystopia” and could prompt the emergence of a new class of critical fragile states -- formerly wealthy countries that descend into lawlessness and unrest who are unable to meet their social and fiscal obligations.
The Arab Spring, the Occupy movement and the European protests are all the result of civil discontent derived from lack of opportunities, inadequate safety nets and unstable financial systems.
Meanwhile, the poorest of the poor have been hit the hardest by globalization as UN food security czar Olivier de Schutter notes in a Project Syndicate article. de Schutter asserts that the free trade model has “failed spectacularly” as underdeveloped countries continue to rely on trade as opposed to investing in domestic agriculture. In so doing citizens are left vulnerable to volatile global pricing which simply yields more hunger and insecurity. According to de Schutter:
Despite the persistent challenges of hunger and food inequality, people are told to embrace more open markets, more trade, and more globalized economic processes. Yet open markets do not function as perfectly as many at Davos would like to think. Food moves where purchasing power is highest, not where the need for it is most urgent.
Typical policy tools employed by Western capitalist societies have failed to correct the crisis which has caused some experts to bemoan the end of the free market while predicting the coming of an unthinkable replacement. Adrian Wooldridge in a special report for The Economist writes that, “The era of free-market triumphalism has come to a juddering halt… State capitalism increasingly looks like the coming trend.”
A panel of experts at Davos painted a dark forecast including David Rubenstein, managing director of the Carlyle investment fund. According to AFP Rubenstein agreed that state capitalism is a more reliable creator of jobs than laissez-faire, but warned: “It is not going to create the kind of highly paid jobs with the kind of retirement security that we like in the West.”
Ben Verwaayen, CEO of France’s Alcatel-Lucent, provided an interesting perspective by pointing out how everyone wants the cheap products without the downside, and believes Western consumers are in for a rude awakening, saying:
“The consumer goes to the grocery shop and buys globalization and then he leaves the shop with his two bags full of globalization and turns to the government and says: ‘Protect me from the results of this’.”
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