Backlash Against Globalization
Lessons from the Road: IMF Advisor Explains the Backlash Against Globalization
Our recent Closing Bell in Washington, D.C., featured Prakash Loungani. An Advisor and Senior Budget Manager at the International Monetary Fund (IMF), Prakash also serves as Adjunct Faculty at Owen, teaching macroeconomics to our EMBA and Global EMBA-Americas students. He shared his perspectives on globalization, a topic that’s currently dominating the headlines. An excerpt from his Closing Bell talk follows:
“Let me take you back to 1975. The Indian Prime Minister had declared a state of emergency in the country. Many of my friends — we were teenagers then — spent the years that followed protesting this suspension of democracy. I spent it studying Russian. I figured India was moving even closer into the Soviet orbit, and I was positioning myself to profit from this development. A friend told me: “There are two superpowers. Try the other one. You already speak English. And look, they have so much money.”
That’s how, on my 20th birthday, I found myself in New York. America has been very, very good to me. The thought of living elsewhere has never crossed my mind, not even after recent events. I am a product of — and a big beneficiary of — a globalized world.
So, it is awkward for me to start to be described as one who is somewhat against globalization. My recent paper (with two coauthors) outlines the distributional effects of globalization. We do not question the benefits of globalization. We favor trade. We do question some aspects of financial globalization, the opening up of economies to foreign flows of capital. We do not discuss one hot topic in the paper, but we would firmly support migration. Here is a quick summary:
- We provide evidence that it is difficult to demonstrate the efficiency benefits in terms of increased growth that theory promises. Hot money flows in particular seem to add not to growth but to volatility.
- We show that the opening up to foreign capital has worsened inequality of incomes. Developments over the past 30 years, such as the increased opening up to foreign capital, may have reduced the bargaining power of workers. This could be part of the reason behind the decline in the labor share of income that is observed in many countries.
- The ability of capital to move around more freely has had fiscal consequences. The global competition to attract capital — or to keep it from fleeing one’s country — has led to a ‘race to the bottom’ on explicit and implicit tax rates on capital.
- This in turn has starved governments of revenues, leading to periodic episodes of fiscal austerity. During these episodes of austerity, long-term unemployment goes up, inequality worsens, and the labor share of income declines.
In short, through direct and various indirect channels, financial globalization has hurt equity without helping efficiency — that is, distributional effects, with redistribution often not taking place. Aggregate and distributional outcomes need to be addressed in the design of new globalization and, together, represent where macroeconomics is headed now. As philosopher Soren Kierkegaard said: “Life is lived forwards and understood backwards.” For my work at the Fed, then the IMF and teaching at Vanderbilt, that has been a common theme.”
What is Closing Bell?
Closing Bell brings together Vanderbilt Business alumni, current and prospective students for an evening of fun and learning in key cities.