Davos 2007: ‘Waging’ war on China

Behind their feigned concern for falling Western wages, the elites at the World Economic Forum are really worried about the rise of Asian economies.

Daniel Ben-Ami

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Something weird seems to be happening to the world’s elite. Many of them have apparently become deeply concerned about the poor wages being paid to workers in the developed world. To many observers this might seem as likely as a snake playing the violin. But judging from the discussions at the World Economic Forum in Davos last week, the rich and their advisers are genuinely worried.

Judging from material on the official website and coverage in the financial media it is clear that stagnating wages were a key point of discussion (1). In assessing the debate, it is important to remember that it is not primarily meant for public consumption. The Davos discussion gives some indication of what the world’s leaders are discussing among themselves rather than what they want us to believe.

The Wall Street Journal, a newspaper generally known for its shrill free market editorial line, summed up the discussion: ‘A new refrain is emerging in Davos this year: Globalisation isn’t working for everyone. Stagnating wages and rising job insecurity in developed countries are creating popular disenchantment with the free movement of goods, capital and people across borders.’ (2)

Most of the commentators who expressed concern about Western wages were American although Angela Merkel, Germany’s chancellor, was also prominent. Laura Tyson, a Berkeley professor and former senior Clinton administration official, said: ‘I’m struck by how, this year, the key vulnerability to globalisation is lower wages.’ (3) Robert Shiller, a Yale professor, said inequality left people ‘legitimately worried about their jobs flowing abroad or being replaced by a computer’ (4). Stephen Roach, the chief economist at Morgan Stanley, a top investment bank, advised delegates to: ‘Look at the shares of national income in the major economies of the developed world. The share going to labour is at historic lows; the share going to capital at historic highs.’ (5) Germany’s Merkel said ‘the anxiety is there, because we have competitors that didn’t exist 10 or 15 years ago’ (6). To the extent there was opposition to such views it seemed to be along the lines that technology, rather than globalisation, was to blame for stagnant wages.

Nor was Davos the first event at which such concerns have been raised. According to a leaked email from the International Monetary Fund / World Bank annual meetings in Singapore in October the stagnation of wages in the West was a key preoccupation there (7). Indeed, several former senior Clinton administration officials have publicly expressed their worries. For example, Larry Summers, a former US treasury secretary, has written in the Financial Times about how the ‘global middle’ (by which he primarily means Western workers) is crying out for reassurance: ‘the vast global middle is not sharing the benefits of the current period of economic growth – and that (means) its share of the pie may even be shrinking.’ (8)

So how come the global elite at Davos sounded a lot like old-style trade union officials? Why are the world’s rich concerned about stagnating wages in the West? The answer lies primarily in the rapid growth of developing countries, particularly in East Asia, from the 1990s onwards. Nowadays it is not generally considered acceptable to attack them directly so the criticism takes the indirect form of expressing concern for Western workers.

The divergence in economic performance between the advanced economies and the developing world is clear. For instance, whereas China, by far the most important developing country, has grown by an average of about 10 per cent per year, the advanced countries have grown by an average of between about one per cent and three per cent per year (9). Although there is still a huge gap between the advanced economies and the poorer countries, the developing world is becoming steadily more industrialised. By some measures the developing countries, for the first time ever, account for half of the global economy (10).

In a rational world this development would be wholeheartedly welcomed. The rapid growth of large parts of the third world is helping to lift many millions of people out of poverty. However, for Western leaders it is a cause for concern. They view the developing world, and China in particular, as a growing competitive threat.

The most obvious manifestation of this apparent threat is America’s current account deficit – broadly its exports minus its imports – which is at a historical high of about seven per cent of GDP (11). For many American leaders the blame for this trend lies with a flood of cheap imports, particularly from China, which are undercutting US businesses. They argue that the end of the Cold War led to the integration of billions more people, including the Chinese and the Indians, into the world economy. As a result the wages of Western workers are being undercut.

The catch for Western leaders is that it is hard for them to criticise China and other developing countries too directly. Since there is a broad consensus in favour of the free market it is unacceptable for Western leaders to openly block the development of potential competitors. But it is easier to criticise China and others indirectly by feigning sympathy for Western workers as supposed victims of this process.

As it happens it is wrong to blame the Chinese, or any other foreign workers, for America’s yawning deficit. It is not a given that rapid economic development in the third world should cause economic difficulties in the West. The problem lies more in the relative sluggishness of the developed economies. Indeed the rapid growth of third world markets could open all sorts of new opportunities for them. But America, and the West more generally, finds it hard to adapt to new challenges and conditions.

There are already signs of a protectionist backlash in America. Morgan Stanley’s Roach has counted 27 pieces of anti-China legislation in Congress since early 2005 (12). Talk of ‘managed trade’ – a euphemism for protectionism – is becoming shriller.

Alert readers will have noticed that Britain has not been mentioned in this article so far. But this omission has nothing to do with any principled British support for economic development or internationalism. On the contrary, Britain is peripheral to the discussion because industry is a marginal part of the British economy. Britain depends much more on parasitic income from financial services than actually producing things. But by the same token it is less directly threatened by the rise of China as an industrial power.

There is nothing positive about the elite’s professed concern for stagnant Western wages. If they wanted workers to be paid more, the Davos crowd, which includes the chief executives of many of the world’s largest corporations, could simply increase the incomes of their employees. Their real fear, one they are reluctant to express openly, is competition from the newly industrialising countries of Asia.

Daniel Ben-Ami’s website can be found at www.danielbenami.com.

(1) World Economic Forum

(2) Marcus Walker, ‘Just how good is globalization?, Wall Street Journal, 25 January 2007

(3) Update 2007: The Global Economy

(4) Chris Giles, Upbeat mood clouded by long-term fears, Financial Times, 24 January 2007

(5) Larry Elliott, Target rich or reap growing anger, warn economists, Guardian 25 January 2007

6) Marcus Walker, ‘Just how good is globalization?, Wall Street Journal, 25 January 2007

(7) The email was apparently written by Andy Xie, then Morgan Stanley’s chief economist for Asia, who was forced to resign as a result. It is available at here.

(8) Larry Summers, The global middle cries out for reassurance, Financial Times, 30 October 2006

(9) National and aggregated GDP growth figures are available at the IMF World Economic Outlook database

(10) Update 2007: The Global Economy

11)Figure calculated from the IMF World Economic Outlook database;
U.S. International Transactions: Third Quarter 2006, Bureau of Economic Analysis

(12) ‘Rich man, poor man’, Economist, 18 January 2007

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