Like any building with concrete cancer, trust in a big society-wide idea can seem very solid right up until the moment of collapse

By Bernard Hickey

Ernest Hemingway captured the concept best in this exchange in his novel "The Sun also rises': 'How did you go bankrupt?' Bill asked. 'Two ways,' Mike said. 'Gradually and then suddenly.'

Trust among the general populace in the big idea of Globalisation has been ebbing away over the last 10 years or so around the Global Financial Crisis, but it never seemed like it was about to collapse -- until now.

The election of Donald Trump appears to have been that moment of collapse. Suddenly, it seems, everyone is questioning everything about a 30-year long trend towards ever-freer movement of goods, services, capital and people around an increasingly inter-connected world. Trump's first act as US President will be to tear up the next big act of globalisation -- the Trans Pacific Partnership.

This modern version of Globalisation was really kicked off in the mid-1980s with the reforms unleashed by Margaret Thatcher and then the end of communism in 1989. New Zealand's version of this was unleashed by the Lange-Douglas Government of 1984 and it has been full steam ahead ever since.

Both sides of politics and the broad populace essentially agreed on a social contract. It goes something like this: controls on imports and exports of goods, services and capital would be removed and currencies would be freed to float. This would generate an extra boost to economic growth and the benefits would be broadly shared around in the form of higher incomes, cheaper stuff and more vibrant and diverse societies. The idea was that the inevitable disruptions would be followed just as inevitably by stability in some form and a better life.

The whole idea got turbo-charged in 2001 when China joined the World Trade Organisation and became the factory of the world over the next decade. It got some nitrous oxide from a New Zealand point of view with the 2008 Free Trade Agreement, although New Zealand was not alone in feeling an acceleration of this process as China and North Asia became a lot more enmeshed in the global capital flows, tourism and migration.

The big assumption underpinning this social contract is that most people would be broadly better off because of these massive changes, and that the few who weren't better off would be somehow protected or cushioned or compensated and that it would all work out better in the end.

This question of who would actually benefit from the undoubtedly stronger economic growth created by Globalisation is a crucial one because it's now been long enough to know the answer. The jury is in in the form of the now famous 'Elephant Chart', which shows what happened to incomes along the various parts of the global income spectrum between 1988 and 2008. The chart produced by World Bank Economist Branko Milanovic shows real incomes for poor people in emerging countries such as China rose 60-80%, as did incomes for the richest 2% of the globe. However, the poor-to-middle income groups of America and Europe have not benefited much at all, or in some cases went backward. Milanovic calculates that more than half of the actual gains in dollar terms (not percentage terms) of the economic growth of that period went to the richest 5% of the world's population.

The big assumption at the beginning of Globalisation was that a rising tide would lift all boats reasonably evenly. That didn't happen for large parts of the developed world. The world is demonstrably better off overall, and hundreds of millions of people were lifted out of poverty in Asia and Eastern Europe, but big chunks of the population in the developed democracies of the world missed out, or worse.

Now these people in the provinces and the rust belts of northern England, industrial old Europe and the Mid-West of America are revolting. The Global Financial Crisis was the first sign that something was wrong in the bowels of the globalisation process and the reaction of central banks and Governments simply confirmed the unfairness and flaws in the system for people who were already sceptical. Bankers were bailed out and given bonuses while benefits for Globalisation's losers were cut.

Not everyone believes or feels this, but New Zealand has actually done a much better job of cushioning the blows of globalisation and spreading the benefits around than America in particular, or even Britain and Europe. But the same erosion of trust is happening here, even if there is no collapse yet. New Zealand First's poll ratings are an obvious sign, along with the changing stances of other politicians closer to the centre who can sense the cracks appearing in the edifice and can feel the ground rumbling underneath them.

The default position for many now is to distrust apparently rootless multinational companies who have played countries off against each other to reduce their tax bills and generate ever-bigger profits for their equally rootless investors.

Prime Minister John Key has his ear close to the ground and this week he told the ultimate face of rootless cloud-based globalism, Facebook founder Mark Zuckerberg, to win back the trust of the globalised masses by paying its taxes.

"There's a bit of a feeling - that would have got Donald Trump elected - that somehow the world wasn't fair," Mr Key said, adding Mr Zuckerberg needed to demonstrate Facebook was paying its fair share of taxes in every country.

"I think if they don't, the same people who are its users will wake up one day and say 'why do I have to pay my tax if this company is not going to.'"

It's a bit late for that now. People are wide awake. Mr Key hopes that the social contract supporting Globalisation in New Zealand is not broken and can be repaired with a few tweaks and some good PR. The trouble is Globalisation is truly global. It only works when everyone globally believes in that social contract, and that is broken.

President-elect Trump is now acting to carry out the wishes of the rural, less educated, former factory workers of the Mid-West to tear up that contract. Brexit voters did the same. Italy, France and Germany are set for elections in the next year that also be votes of confidence the European version of Globalisation. For many who benefited from Globalisation, this shock seemed to come out of the clear blue sky, but it shouldn't have been.

The pressure has been building for years. First, support for the Globalisation contract collapsed gradually in the years since 2008, and then in 2016 it collapsed suddenly with Brexit and Trump.


A version of this article also appears in the Herald on Sunday. It is here with permission.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

29 Comments

Once you give up your manufacturing base in exchange for cheap imports you are getting a short term gain but likely to be poorer as a nation in years to come.
Over the last 20 years Asia has become far wealthier whilst the middle classes in the West have become poorer. It is partially down to laziness and complacency.
It simple terms most millennials will have a poorer lifestyle than their parents. Its a trend that has been going on for years but Joe Public is only just waking up to the fact.
Personally I think the trend is irreversible unless there is a major change in mindset.

You are starting to see that change now with Brexit and Donald Trump as President elect

There is more going on than just the reduction in globalisation.
This latest missive from Monbiot gives one food for thought - glad I won't be around in 30 years time!
https://www.theguardian.com/commentisfree/2016/nov/25/13-crises-we-face-...

Look on the bright side, antibiotic-resistant infections might get us first.

That might be the answer to the fundamental problem: too many people and breeders.

up
15

Key thinks people might wake up to Zuckerberg and co sometime. Excuse me ! Key's job was to wake up to that years ago - and more importantly - do something about it.

I thought JK told him to fix his NZ PR around taxes, big difference to making them pay a fair share and says a lot about whom JK looks after
Key met Zuckerberg while at a summit of about 1500 CEOs as part of the Apec Summit.

"I was reasonably blunt. I said I thought that Facebook did have an issue in terms of the perception of its tax policy and I thought he needed to change that."

Asked how Zuckerberg responded, Key said "I think he was a bit surprised."

Dead right

JK has got the press gallery and the media on the end of a string

He has an excellent idea how what he spouts will be broadcast and how sound-bites work

Say something ambiguous and it will be reported as if he has done something

Zuckerberg and our tax base is like a cat with a mouse. He 's going to jump on it. Key telling him off is as pointless as me giving my cat a good talking to.. We need the people in chrge of tax law to make new tax law. Now who is that. It's ......... (and Woodhouse)

up
20

The political classes, bankers and corporate lobbyists were far too busy wining, dining and congratulating themselves to notice what the rabble were thinking.

Reagan/Thatcher and the neocons smashed the union movement, the bankers blew up the debt fuelled bubble and the lobbyists corrupted the taxation/legislative system allowing corporations to raid the public purse.

Populations have been distracted by so-called "third way" leaders but have finally woken up to realise they are being thoroughly worked over. What has been unleashed is a very dangerous and mis-guided form of nationalism which will be hard to put back.

The consesus is broken and politicians of all persuasions would be wise to embark on policies that reverse the transfer of wealth from the many to the few.

Clinging to the idea that the market will fix this is not exactly wrong as it will ultimately fix it. Just that it will be in a catastrophic way.

Mr Key remonstrating Zuckerberg might provide him with a nice headline but does sweet fa to rebalance the system. The idea that corporate leaders and bankers will act in a morally and socially responsible way has long been proven a fantasy.

I appeal to governements to start to govern for the many rather than the few as this is beginning to look very ugly.

It is funny though that middle America is trusting a Businessman who must have benefited from the Globalisation, which they perceive is the cause of their misery.

Social media/Smartphone entertainment has kept people from realising/recognising/understanding the slide in income/living standards for many, that has resulted in this infant revolution against Globalisation.
The lessons of the GFC were not learned correctly, in the magical glow of the Obama Presidency.

This nascent change has a few more years to play out. Interesting times ahead. But it is a wake up call certainly for the governments in the west to rethink their policies/priorities and to widen their constituency from the elites to the hurting citizens in the middle.

In a globalized economy people are worth the same everywhere so if the average wage for a factory worker in China is $300 per month then that is the rate they will be everywhere else. If their wage is higher say in NZ then they are being subsidized by others.

Also the big issue is money. What gives the money value? Globalisation only works for everyone if there is a gold standard or something similar that would reflect the flow of value of products across borders.

The only way the developed countries have kept an illusion of growth has been through enabling massive increases in debt. This is the money that has flowed to the less developed countries but it has left the developed countries in debt and created a lot of hidden inflation.

At some point the true worth of our currencies and countries will be revealed and we will see our lives change dramatically. The price of houses and the homeless are just a sign of things to come.

It is well worth reading this in conjunction with Matt Noland's Friday Top 10 with Matt rejoicing in globalisation and immigration and Bernard highlighting the pitfalls. The key points are that our western middle classes have been under huge pressure for forty years with declining real median incomes, high unemployment, rising debt, continuous current account deficits, rising suicides, declining social mobility, greater inequality, loss of sovereignty and privacy. Here in New Zealand the median income is insufficient to own a house and raise a family without a government hand out - and half the population earns less than that. Things like that and the never ending current account deficit is screaming out that something is very wrong.
How can anyone be surprised that there is discontent, revolution in the air.

"NZ's median income (that's what half the population earns)"

False

That figure is the top of what the bottom-half of the population earns - it's the mid-point

Thank you, I have edited it.

I would argue for NZ the most similar period to now is the early 19 century Britain. The end of the Napoleonic wars had bought in a period of international peace, trade and prosperity, but there were huge internal divisions between the 'have and have-not's', as that prosperity was not been fairly divided. Britain dealt with this problem by gradual reform giving more political power and economic gains to the 'have-not's'. Europe did not and had the 1848 revolutions and the US had the 1860's Civil War.

In NZ today, the biggest group of 'have-not's' is generation-rent and the biggest group of 'haves' is generation-own. This is probably true for many Anglo-world cities, but general in the US the 'haves' are more about the 'establishment' permanently favouring the managers and owners that make up the corporate class of Wall Street, while the 'have-nots' are the workers and small businesses which make up Main Street. The likes of Robert Reich in the US have demonstrated that low to middle income workers, especially males have had no real income gains for 20-30 years, despite making productivity gains. It was this group which didn't vote Democrat in the numbers which they previously had -meaning Hillary got less votes than Obama -especially in swing States, while Trump got about the same number of votes as Mitt Romney.

In NZ, John Key is desperate to put out the fire of Generation Rent versus Generation Own narrative. As recently as yesterday on TV3's The Nation, he was telling a nice story about housing construction picking up -that there is a wall of housing coming on stream and the lag effect will eventually sort out the housing market.....that the growing economy will easily cope with the Kaikoura earthquake and a combination of tax cuts and grants for low income families are coming soon to fairly divvy up the gains from a growing economy....

Of course, John Key's story is half true and half spin. For instance -Canterbury has had a residential building boom far exceeding any previous boom and that combined with section prices being under $200k in places like Rolleston and Rangiora put a lid on all house price rises in Greater Christchurch. The Auckland residential boom has yet to ramp up to the size of the early 2000's building boom under Clark and Cullen and that building boom was inadequate to contain house price rises back then, so why would a smaller building boom now contain prices? On the price side of the equation, land banking is far greater in Auckland and section prices are 50 to 100% greater than Canterbury and they are still rising. So I doubt John Key's lag effect story.

As to whether the property 'haves' can compensate the 'have-not's' with tax cuts and grants -again Clark and Cullen tried that with Working for Families and it didn't work......

What is need is a structural reforms to even up the playing field between Generation Rent and Generation Own. In my opinion if reforms are not provided then the risk of some sort of revolution down the track could rise to dangerous levels.

I have written more about this here.
https://medium.com/@brendon_harre/housing-affordability-reform-or-revolution-ad3ac2d896c6#.lrp1mt6rl

https://medium.com/@brendon_harre/housing-affordability-the-question-is-why-not-how-or-what-cefffd2f9924#.8nf4me54l

Thanks Brendon, best post I've read here for a while, and you only mentioned the T word once.

You are welcome Macadder -it was nice someone noticed it. I was getting the impression that no one was reading it....

Comrade Bernard, yr repeated, snide label of "less educated" describing the people who voted for Brexit and Trump tells us more about you, than them.

When there are no trade barriers, nations that can produce a given good or service at the lowest price will end up with the majority of the market for that good or service. Since labor costs make up a large portion of the cost of producing goods, nations with low wages will outbid those with high wages, resulting in high unemployment and decreasing wages in the formerly high-wage countries. The result is a race to the bottom in which wages everywhere decline toward those of the worst-paid labor force in the free trade zone.

I think it boils down to this. Cheaper consumer products temporarily gives a 'I am richer' feeling but this is often followed by job loses and declining wages.

up
11

If, as you say Bernard "Not everyone believes or feels this, but New Zealand has actually done a much better job of cushioning the blows of globalisation and spreading the benefits around than America in particular, or even Britain and Europe" I do not think that this has anything to do with the policies of this Government. If we have done any better, it is because of the billions of dollars poured into Christchurch for the earthquake repairs. John Key must be on his knees thanking the good lord for the Kaikoura earthquake. It will ensure his re election too just as it did Christchurch Mayor Bob Parker in 2010. He was going to lose that election big time but the September Quake came just in time

....the benefits would be broadly shared around in the form of higher incomes, cheaper stuff and more vibrant and diverse societies.

Claiming that more vibrant people is a benefit for the Kiwi people seems a bit of a micro-aggression quite frankly. It's saying that we weren't very vibrant before. What does vibrant mean? My dictionary says:

Pulsating with vigor and energy, vigorous, energetic, vital, exciting, stimulating and lively.

I actually thought we were pretty vibrant before the changes. NZ has always been a world leader and punched way above its weight. What about all these folk:

Ernest Rutherford, Kate Sheppard, Sir Edmund Hillary, Jean Batten, Peter Snell ,Janet Frame, Katherine Mansfield, Richard Pearse, Sir Bernard Freyberg, Dame Kiri Te Kanawa, Sir Keith Park, Sir Peter Blake, James K Baxter, Colin McCahon, John Clarke, Sir John Walker, Frances Hodgkins, Frank Sargeson, Rewi Alley, Charles Upham, Billy T James, A J Hackett, Ranganui Walker, Sam Hunt, Bob Jones, Tim Shadbolt, Dave Dobyn, The Finn brothers, Barry Crump.

Of course many more too. These days we don't seem to produce much in the way of great people. Have we become more vibrant or less vibrant?

You would have to be an old-timer to recognise the absence of "vibrants" on the television news at night among the locals being interviewed in Cheviot and Waiau and Lyford and Hunderlee and the many other rural villages south of Kaikoura

Possibly these devastated people and places need some vibrant eateries for a pick-me-up

My feeling is that Trump may bring reality to the US economy, after years of spin about how good it's going. Will Donald become a politician or try to act. His ideas for one trillion in infrastructure spending, along with massive tax cuts are good in theory, but at the same time the fed is hinting towards higher interest rates. Reality is different to theory. Can they achieve both?

Not even compatible in theory, much less reality.

best analysis of the present situation so far,dont see any changes happening here,the uneducated in NZ, which could be code for the 50% with an IQ below average,vote for rich successful people as leaders,not realising that the rich only know how to enrich themselves and their family and not others.

So, an earthquake or a series of earthquakes is coming soon to the Western economies, due to the concrete centre shaking because of the lessening of the trust..Is that what you are saying, Bernard ?

Regarding revolution. The Clinton's campaign is actually pursuing the narrative that Russian hackers skewed the election and they're challenging by recount! Imagine the anger of the disenfranchised middle class who Bernard is talking about that voted for Trump! They could well leave their placards at home, and go out with AR15's. Probably would entail martial law.

The big assumption at the beginning of Globalisation was that a rising tide would lift all boats reasonably evenly
.....
But Oliver Hartwich insisted that they do.