Globalization and the Rise of the Global Middle Class
Analysis of globalization in recent years has focused primarily on the “supply shock” created by a huge increase in low-cost labor in China, India, and other emerging markets. Citizens in the developed world view this as both positive due to the falling cost of consumer goods and negative due to the perceived pressure on their jobs and wages.
But a new phase of globalization is now underway due to the “demand shock” caused by rising prosperity in middle-income countries. Over the coming years, millions of people in the BRIC countries—Brazil, Russia, India, and China—and elsewhere will be lifted out of poverty and see their disposable income rise. This creates challenges in resource scarcity and the impact on climate change while bringing great opportunities as businesses compete to meet the new demand for goods and services, and millions of jobs are created.
So how should developed countries respond? In March, Lord Peter Mandelson—who served in a number of cabinet positions under both Tony Blair and Gordon Brown—launched a major program on the future of globalization on behalf of the United Kingdom’s leading progressive think tank, the Institute for Public Policy Research. The research—which will conclude in January 2012—looks at who benefits from globalization, and examines what Lord Mandelson describes as “two very different globalisations” defined as the “Davos view of globalization” seen from “10,000 feet” and the on-the-ground view where it seems that “jobs and opportunities in the fast developing world are created at the expense of our own employment and standard of living.”
Specifically, the research is examining four key questions:
- How do domestic policy frameworks in developed countries—including industrial policy, fiscal policy, labor market regulation, skills and education, and immigration—need to change to ensure both that developed economies can remain competitive and that trade delivers on progressive values at home?
- How can Britain improve its export performance and plug its £27 billion export gap with the BRIC countries?
- How can trade and open markets deliver maximum economic benefits for the world’s poorest countries and help them deliver sustainable development for their people?
- How do global and European economic institutions need to change to respond to the changing balance of economic and political power between regions and countries in order to deliver solutions to global economic challenges including trade liberalization and global imbalances?
To help answer these questions, the research team is undertaking a series of fact-finding missions. So far we have visited two of the BRIC countries: Brazil and China.
In Brazil, we found an increasingly self-confident country that recently overtook Italy as the world’s seventh-largest economy. Brazil’s private sector is booming, having survived largely unscathed from the financial crisis. Meanwhile, the successful Bolsa Familia (family allowance) policy—which provides financial aid to poor families that enroll their children in elementary school—has helped reduce inequality, cut poverty levels, and created 50 million consumers in the “new middle class.”
Brazil’s international economics policy is also dramatically shifting. Brazil is looking increasingly toward China and away from Europe, and business and government are both hardening their position toward further trade liberalization. The upshot is that European countries will have to work harder to gain Brazil’s attention. Lord Mandelson’s review will examine ways in which European businesses should raise their profile in and increase their exports to Brazil.
In China, the recently published 12th five-year plan makes clear that China’s development is “unbalanced, uncoordinated and unsustainable” despite the economy’s continued rapid growth. Key to addressing this is a rebalancing of China’s economy toward domestic consumption, which currently stands at 35 percent of GDP, and away from an overreliance on net exports and investment.
These themes are consistent with the Center for American Progress’s “virtuous circle” thesis, which outlined that raising Chinese demand through increased provision of social safety nets was critical to rebalancing the global economy.
Global businesses, including Hewlett Packard, which we visited in the rapidly growing city of Chongqing, are benefiting from this huge expansion in domestic Chinese demand for goods and services and the investment opportunities presented in China. The challenge in the years ahead is for China to open up more of its sectors to global competition and improve the ease of doing business in the country so smaller businesses and entrepreneurs can join multinationals in benefiting from these rapid changes. The IPPR review aims to set out how British and European firms can emulate the success of American firms like HP in benefiting from the increased Chinese demand.
Later this year, we will visit India, Germany, Belgium (seat of the European Union), and Washington, D.C., to understand how other countries are coping with and thinking about the latest phase of globalization. Decision makers will need to consider policy implications at both the domestic and international level.
Our leaders need to consider:
- How we provide industrial support for key sectors where competitive advantage lies
- How we continue to raise the education and skill levels of our workforce to ensure that businesses have the people they need
- How to reform our labor market policies to ensure that those in work are properly rewarded for their endeavors and that those who miss out or find themselves unemployed are given support and treated with dignity as they get back into the labor market
Internationally, we will need to work much more closely with other countries to ensure that global solutions can be found to a range of issues from creating a level playing field for companies competing in the global economy to mitigating the impact of climate change to preventing another financial crash decimating much of the world’s productive capacity.
None of this is easy, but a unilateral approach that seeks to ignore these trends is not the answer. Countries such as Britain and the United States must engage multilaterally to ensure that the global economy works better for their citizens and that the next set of global rules enhance rather than diminish that shared prosperity.