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The global middle matters

October 30, 2006|Lawrence H. Summers | LAWRENCE H. SUMMERS is a contributing editor to Opinion.

AGAINST ALL ODDS, we are living in a time of plenty. Neither the aftershocks of Sept. 11 nor a tripling in oil prices has prevented the world's economy from growing faster in the last five years than in any five-year period in recorded economic history. Given recent economic performance and the pricing-in by world markets of an optimistic outlook, one might have expected this to be a moment of particularly great enthusiasm and widespread support for free markets and for global integration.

Yet, in many corners of the globe, there is growing disillusion with the market system and global integration. From the failure to complete the Doha round of global trade talks to pervasive Wal-Mart bashing, from massive renationalization in Russia to the increasing success of populists in Latin American and Eastern European politics, we see a degree of anxiety about the market system that is unmatched since the fall of the Berlin Wall and probably well before.

Why is there such disillusionment? No doubt particular factors in individual countries enter into the equation. Some anti-globalization sentiment stems from opposition to the Bush administration's foreign policy misadventures. But there is a much more fundamental and troubling source of resistance: the growing recognition that the vast global middle is not sharing the benefits of the current period of economic growth -- that, in fact, its share of the pie is not growing and may even be shrinking.

John Kenneth Galbraith was right when he observed: "All of the great leaders have had one characteristic in common. It was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership."

Meeting the needs of the anxious global middle is the economic challenge of our time.

Two groups have found themselves in the right place at the right time to benefit from globalization and technological change. First, those in low-income countries, principally in Asia and especially in China, that are able to plug into the global system. Low wages combined with the accessibility of technology and capital via financial markets have fueled an economic explosion.

It is important to remember that the period between the late 18th and early 19th century in Britain and continental Europe was called the Industrial Revolution for a reason. For the first time in human history, the standards of living of one generation were visibly and demonstrably better than the one before. In a single human lifespan, real per capita incomes doubled, and then doubled again. If sustained, the growth rate experienced by China during the last 30 years would lead to a hundred-fold improvement in living standards over a single human lifespan.

Second, it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. Those who own or operate businesses that can take advantage of globalization to rely on less expensive labor and to sell to larger markets than ever before have seen their incomes rise far faster than incomes generally.

Everyone else has not fared nearly as well. Low-cost labor -- ordinary, middle-class workers and their employers, whether they live in the American Midwest, Germany's Ruhr Valley, Latin America or Eastern Europe -- are left out. This is the essential reason why median family incomes lag far below productivity growth in the United States, why average family incomes in Mexico have barely grown in the 13 years since NAFTA passed and why middle-income countries without natural resources struggle to define an area of comparative advantage.

It is this vast group -- which lacks the capital to benefit from globalization and cannot imagine competing on cost with Chinese workers -- that is desperately seeking either reassurance about the shrinking world or a change in course. And yet, without its support, it is very doubtful that the existing global economic order can be maintained. The twin arguments that globalization is inevitable and protectionism is counterproductive for almost everyone have the great virtue of being correct -- but they do not provide much consolation for the losers.

Economists rightly emphasize that trade, like other forms of progress, makes everyone richer by enabling people to buy goods at lower prices. But this opportunity offers small solace to those who fear that their jobs will vanish. Nor can education be a complete answer at a time when skilled computer programmers in India are paid less than $2,000 a month. More can be done to strengthen protections for displaced workers. But such an approach is inevitably reactive and defensive.

In the United States, and perhaps beyond, the political pendulum is swinging left. The best parts of the progressive tradition do not oppose the market system; they improve on the outcomes it naturally produces. That is what we need today.

There are no easy answers. The economic logic of free, globalized, technologically sophisticated capitalism may well be to shift more wealth to the very richest and some of the very poorest in the world, while squeezing people in the middle.

Just as the GI Bill and domestic housing programs in the aftermath of World War II were crucial parts of the overall policy approach in the United States that permitted the Marshall Plan, GATT and international financial institutions to go forward, our success in advancing international integration will again depend on what can be done for the great middle class, at home and abroad.

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