Hello, welcome to visit Shanghai Forum
Zheng Yu
Professor, School of International Relations & Public Affairs, Fudan University;
Distinguished Professor of Shanghai Oriental Scholar
We are really living in a time of lack of consensus. Research shows that the number of protests globally has increased by 11. 5% annually since 2009. But for the next 3 weeks, we probably can see a surge of the gathering for excitement and happiness, not for anger and grievances. I’m talking about the FIFA world cup, which is currently held in Qatar. The football industry is characterized by superstars such as Cristiano Ronaldo and Lionel Messi. Superstars are also millionaires, multi-millionaires. Globally, these multi-millionaires have captured a disproportionately share of the global wealth over the past decades. This increase has been exacerbated during the COVID time. In 2021, the richest 50,000 people owned over 6% of the global wealth, more than 3 times that was owned by the poorest half of the world’s population.
The rising inequality in our time fostered the debate on the consequence and the prospects of globalization. In the last several decades, the world has gone through an increasingly fast growth of the globalization. But since the global financial crisis in 2008, changes in economic and political dynamics have significantly slowed a common globalization. And the recent geopolitical tensions and COVID pandemics has also step up the speculation about de-globalization or slowbalization. In a recent survey by the International Trade Union Confederation, over 85% of the world’s people want to see the rules of globalization rewritten.
We know that geopolitical conflicts are certainly the primary feature of global politics. But underlying political conflicts in the global economy are not exclusively among nations. They often have domestic reasons. The UN Secretary-General António Guterres recently just highlighted the global crisis of inequality as a growing threat to our future that should be addressed with a New Global Deal before it destroys our economies and societies.
Has globalization created any benefits? Well, unquestionably, the overall living standards has improved. In the past three decades, more than 1 billion people has been lifted out of the poverty, which is less than $2.15 per person before the COVID pandemic hit the worlds. However, during the same time, we see more than 70% of the world’s people are living with rising income inequality. The top 1% of the humanity have captured nearly 20 times the amount of the wealth as the bottom 50%. In developed countries, more than 50% of the 20-year-olds were in higher education. But the number in less developed country just dropped to 3%.
Indeed, globalization has created opportunities, but also intensifies the risks and inequality, insecurity. Insecurity and risks are not shared equally. Distributional tensions between workers, regions, and generations are rising, and inequality of opportunities remains consistently high.
Digital technology advances have also contributed to the increase in income inequality. In history, technological advances have played different roles in shaping income inequality. The key technological advantage in the 19th century has created a fast demand of the unskilled workers and increase the mobility of these workers between the manufacturing industries, which led to the downwards trend of income inequality. But since the end of the 20th century, however, technological advances have different effects on income inequality. Digital technology, in particular, has allowed the star firms to scale up and become the superstars. They also increase the demand for high-skilled workers at the cost of low-skilled workers. This is the reason why we actually see the globalization has really increased inequality.
The existing social contracts, such as tax, transfer, and market regulations, are not very effective in coping with this distributional tensions. The dissatisfaction with the status quo and the trust deficit towards the current social and political arrangements have resulted in political polarization and the rise of the populism in many countries.
It’s not the first time in history that countries face this distributional crisis. Nearly 80 years ago, Karl Polanyi in his book, The Great Transformation, explained that the failure of the first era of globalization was caused by the expansion of the market forces underlying the social structure and giving rise to those radical political forces. So therefore, it is necessary to strengthen the state capacity to hinder the imbedding of this market from society.
In much of the 20th century, the welfare states was the answer and was the fundamental means for the western countries to embrace the economic liberalization through the domestic social contract. However, globalization has made it increasingly difficult for countries to compete for international capital while maintain high level of the social protection at home.
In the 80s, the western countries have implemented the so-called the Third Way Reforms, emphasizing the balance between the economic security and competitiveness in response to these uprising globalization forces. However, globalization, in many ways, has increased the need for the modern welfare state, but in the same time reduced the state capacity to meet this need. The tension seemed inevitable.
Asian experience in curving the inequality and achieving inclusive growth
Increasing inequality has created profoundly negative consequences, which is major obstacle for achieving inclusive growth, a key development objective for the 2030 SDGs agenda. In the developing countries, in general, there is a continuous challenge of tight resource constraints, poverty and rapid population growth. Achieving inclusive growth is particularly difficult.
In the past several decades, most of developing countries have experienced decrease in poverty, but they have higher inequality. On average, Eastern Asian countries performed much better than other developing countries in other regions on both reducing poverty and containing inequality. Several factors contribute to this miracle of the growth with equality, including the export-oriented industrial strategy, high investment in education, sound economic governance, relative labor flexibility and the Asian culture value.
But since the 1990s, however, we see this original Asian model has also constrained by this transformation of international and domestic environments. Reliance on the trickle-down effects of the growth seems have left Asian governments ill-equipped to respond to the social disruption, triggered by the Asian financial crisis in the 1998. Nevertheless, after the crisis, we see those East Asian countries quickly bounced back and adapted to this evolving international environment. They have retained considerable capacity to protect the distribution of losers and contain inequality. During the last decades, in particular, we see over 80% of the East Asian economies demonstrate a trend of inclusive growth, but it is fair to say that the social production system is far less adequate than those of the welfare states.
China’s path of inclusive growth
China’s experience was similar. Over the past four decades, China has made remarkable achievements in poverty reduction. Its poverty rate has decreased from 88% in 1981 to essentially 0 in 2020, lifting approximately 800 million people out of absolute poverty, which contributes to 3/4 of global poverty reduction. However, income inequality increased rapidly onto the first decades of the 21st century.
But during the last decade, we actually see some positive signs. With the structure transformation and growth of the middle class, the Chinese economy has demonstrated progress towards inclusive growth. Income inequality, both in terms of the Gini coefficients and also the percent ratios, has declined slightly. China’s performance inclusive growth can be attribute to several fact. Let me just outline three key drivers.
The first driver is industrial upgrading. China has shifted from basic manufacturing to advanced manufacturing domains that requires more skilled labor, more competitive technologies. And wages tend to rise as a supply of the low-cost labor reached its limit. As a consequence, China’s labor share of its GDP has increased since last 10 years, which is the select outlier of this global change.
The second driver is the prioritized infrastructure investment, which is essential for economic growth and public reduction. But most importantly, we see China has relied on those infrastructure investment to counter economic downturn and external shocks. In the middle of this COVID-19 pandemics, the Chinese government was, once again, relying on infrastructure investment to avoid the economic downturn. The planned infrastructure investment has amounted to approximately more than $2 trillion over the next five years, more than double the new infrastructure spending, which is planned by the United States during the same period.
The third driver is the state-mediated strategy for poverty reduction. Industrial growth and infrastructure investments have lifted millions of Chinese out of poverty. However, to eradicate poverty requires more than just a growth-oriented in industrial policy. China’s approach to this poverty alleviation is designed to target the poorest and the most vulnerable society, rather than the privileged or better-off. This strategy, accompanied by the expansion of the social welfare, social protection has helped China to achieve its goal to eradicate absolute poverty in 2020. Overall, despite its low social spending, China’s efforts to balance distribution at the production stages have made its economic development more inclusive.
To rebuild the national social contracts
So what kind of message can we take away from the ancient and Chinese experience in achieving inclusive growth? This growth lifts entire economies, so the primary effects of this growth is positive for inclusion. However, the benefits of that growth will not be distributed equally without a suitable social contract. So everywhere that we see these domestic contracts work very well, inclusive developments will be strengthened.
All countries in designing their plans for sharing prosperity must work out precautious balance between the often-conflicting goals of growth and inclusion. But the statistics seems disappointing and discouraging. 94% of workers in the world supply chains are doing low-wage, insecure and often unsafe work. 70% of the world has no or inadequate social protections.
The world has experienced three ways of globalization so far. The first one was actually colonized globalization happened in the 19th century. The second one was new-liberal globalization. And the world now stands at the start of the third wave of globalization. Today, transition and transformation, again, is the order of the day. After 40 years of the new liberalism tearing at our social fabric, what would a new social contract for the 21st century look like?
I think a robust social contract fit for the contemporary society should include three components. First, a stable political environment to enable long term and predictable economic governance. Second, a forward-looking strategy to adapt to the digital technologies and the transition to a clean energy economy. The third is a dedicated intervention to reduce economic inequality and social exclusion.
To rebuild the regional and global social contracts
To revitalize these national social contracts is an important step for achieving the sustainable globalization, but we also need the regional and global social contracts. The COVID-19 pandemic adds to rising geopolitical legal tensions, illuminates the need to move away from its current global social contract, which focus on maximizing national interest at the cost of global common goods.
For the past several decades, despite some challenging moments, Asia has had remarkable records of the inclusive growth. Now, Asia is in the middle of the historical transformation. If it continues to follow its recent trajectory, as predicted by the Asian Development Bank, it would double its share of the global GDP to 52% by 2050 and make 3 billion additional population affluent by current standards. Although this prospect is promising, it doesn’t mean that the path ahead is easy or require just doing more of the same. Indeed, continuing success would require the strengthening of our regional social contract to resolve a broad array of the difficult issue over a long term.
A 21st-century global social contract should design to maximize the benefits of global economic interdependence, while minimize the risk of the global conflicts. The global development should be the central pillar for construction of the global contracts. There are two reasons. First, it suggests a definition of the development as the global imperative in which all nations and people have a common interest. The second point is, it suggests that we should put high priority on strengthening the multilateral institutions that manage and protect workers and protect common interest by fostering growth and sustainable development worldwide.
Let me just offer a few concluding remarks. In the post-COVID era, globalization will be predicated upon active domestic intervention to revitalize the national social contracts. The social contract, of course, is not a standard package, nor is there a one-size-fit-all prescription that will suit different countries. Each country, each society must set the term of the social contract, according to its own unique history, culture, political and economic settings.
What all countries do share is global challenges like economic recovery and climate change at this moment. Solving them will be impossible without the sense of the common purpose. We must recognize our global interdependence while also reknitting the ties of the neutrality that holds our societies together.
Only with this new social contract at the national, regional and global levels, can we rebuild the trust needed to achieve solidarity both within the countries and between countries. This is how we can make the new globalization more inclusive and sustainable.
(This article is edited based on the recording and has not been reviewed by the speaker.)
