Last Saturday, in a windowless room thousands of miles from Berlin, a sentence was spoken that could change the world: “The benefits of growth need to be shared more broadly within and among countries to promote inclusiveness.”
What is sensational is not the statement itself but the person who made it. Nor was it at an activist convention or Social Democratic Party congress but at a meeting of some of the world’s most powerful people: the G20 summit.
As the central message in the group’s final declaration, it is something like a policy statement. It announces an political undertaking on a large scale: the social-democratization of the global economy – to stop the world from falling into the hands of populists.
According to World Bank economist Branko Milanovic, globalization has caused the 'most extensive redistribution of income since the Industrial Revolution.'
Planning for the operation started weeks ago, under strict secrecy. Finance ministers were in the know together with heads of government and state secretaries – as well as an official by the name of Holger Fabig. He heads the Office for International Affairs at Germany’s Finance Ministry. Mr. Fabig is Wolfgang Schäuble’s liaison man and is responsible for planning G20 summits. It means that Mr. Fabig writes lots of emails to his partners throughout the world and reaches a consensus with them about what will be discussed at these meetings.
When the talks begin, Mr. Fabig normally sits in an adjoining room in front of his laptop and works out with his colleagues the final declaration that all participating nations will ultimately agree to.
This is exactly how it was last weekend at the G20 meeting in Chengdu in western China – with one major difference. Normally the negotiators haggle for hours over every word, because each country wants to assert its own views. But this time things were brought to a speedy conclusion – because of the danger in delay.
Right before the summit began, Donald Trump was nominated as the Republican presidential candidate in the United States, and G20 circles are no longer excluding the possibility that France could fall into the hands of Marine Le Pen of the right-wing populist National Front, and that the euroskeptic movement of Beppe Grillo could gain control of Italy.
An email making the rounds on Wall Street shows the depth of the uncertainty, written by an investment banker at Deutsche Bank. He attributed the outcome of the referendum in Britain to the population’s “deeply felt dissatisfaction with the way the global economy works.” The triumphal procession of the populists can be stopped only by “radical rethinking.” Politics must redistribute income “from those who have too much to those who have less.”
The American G20 negotiators also read the email. They’ve noticed that in financial companies, the fear of Mr. Trump has become greater than the fear of higher taxes. Faced with calamity, the world of capital is reassessing its priorities – and that opens up some political wiggle room.
Last week in Berlin, there was recognition of the way the wind is blowing. Jacob Lew had an appointment with Mr. Schäuble. Mr. Lew is the U.S. treasury secretary and – like most of his predecessors – was an investment banker before switching to politics. At Germany’s Finance Ministry, Mr. Lew made such a passionate plea for more social justice that Mr. Schäuble’s people were asking themselves whether he now works for Bernie Sanders. Mr. Lew said the time has come for globalization to also benefit “working families and the middle class.”
This is exactly what was meant by the sentence in the final G20 declaration from Chengdu. But its significance becomes apparent only if you take a step back.
A few years ago, American political scientist Samuel P. Huntington coined the phrase “Davos man.” He was referring to the members of a global elite who see themselves as global citizens and each January make a pilgrimage to the World Economic Forum in Davos.
The Davos men and women have long ignored the rise of populists. The cynics because they were busy pocketing their generous bonuses while the less-cynical representatives because they believed globalization would end poverty.
This was the promise made by free markets and which reached deep into the left of the political spectrum: If the state got out of the way, prosperity would increase – and because the additional money would be spent and make jobs secure, the wealth would gradually flow down to the lower classes of society.
This trickle-down theory saw amassing individual riches as a good deed, providing the moral framework for the greed of financial markets. Not so long ago, former British trade minister Peter Mandelson – a member of the Labor Party – could justify his inaction in the face of financial excesses in London’s City by saying he was “intensely relaxed about people getting filthy rich in his country.”
But only the first part of the promise has been fulfilled: Globalization has given rise to unimaginable wealth, but almost none of it has trickled downward, at least not in western industrial nations. The income of American households – after correction for inflation – has essentially remained flat since the 1970s. Back then, the richest 1 percent of the population possessed around 8 percent of the nation’s income. Today the figure is 20 percent. The rich haven’t spent the money but deposited it in bank accounts or invested it in the stock markets. And many well-paid full-time jobs in industry have been replaced by precarious employment.
Labor-market expert David Autor of the Massachusetts Institute of Technology recently published a study that drew attention in the U.S. public debate because it could be read as a defense of Mr. Trump’s arguments. Mr. Autor showed that increasing competition from Chinese producers of cheap goods destroyed many jobs of ordinary workers in U.S. industrial regions.
And contrary to the hopes of proponents of open markets, many of those affected have simply been unable to find comparable employment in other sectors – either because it was too hard for them to adapt or there weren’t enough suitable jobs. More and more people have been forced to apply for state assistance. In those regions of the American Midwest that suffer particularly from low-priced competition, the rate of unemployment 10 years after markets were opened was higher than before. The decrepit streets of Detroit and the glittering facades of Beijing and Shanghai are two sides of the same coin.
According to World Bank economist Branko Milanovic, globalization has caused the “most extensive redistribution of income since the Industrial Revolution”: from the middle classes in traditional industrial nations to the rising middle class in countries such as India and China, where household income has multiplied in recent years. The dividends of this upheaval have been pocketed by a global super-class of financiers and company executives.
Mr. Trump is the product of these effects of globalization that cause many people to see themselves as victims of the anonymous forces of the global market. At least this is how people in G20 circles read the events.
When the national delegations arrived in Chengdu, their briefcases contained a background report by the IMF. Several pages warned that increasing economic and social inequality threatens to destroy the “political backing” for a liberal international order. This is also an admission of guilt, inasmuch as the IMF in particular pushed for the unleashing of the financial markets.
In this sense, the rise of Mr. Trump and Ms. Le Pen can be understood as a signal that globalization has, in fact, gotten out of control.
Perhaps this also explains why populists in Germany are having a harder time of it than in America or France.
Germans have been able to combine free markets with what is in international terms a high degree of social protection. In Germany as well, inequality has risen in recent years, but not nearly as much as in the USA.
The populist response to this lack of equality in the global economy is a return to the nation. It’s evident in Mr. Trump’s promise to build a wall along the U.S.-Mexico border, to punish companies that outsource jobs to foreign countries and to quit the World Trade Organization if necessary. Or in the slogan of advocates of the Brexit that leaving the European Union would allow the British to “take back” control of their country.
But this answer can be expected to be accompanied by significant reductions in prosperity, because the international division of labor has already proceeded far apace. For this reason as well, the powers represented at the G20 summit want to prevent such policies of renationalization.
Reforming globalization in order to save it: This is the intended program. The losers in globalization are to participate more fully in the prosperity that has been achieved. This raises a host of practical questions, such as: Who actually decides who are the winners and who are the losers?
Is it legitimate to limit wage increases for Chinese laborers so that American workers get more – although most Americans are significantly better off than the Chinese? What about the millions of people in Africa who would be happy to participate at all in globalization and suspect that, in fact, industrial nations are concerned only with sealing off their markets?
And what form should the adjustment take? Extra wage payments, an unconditional basic income, better educational opportunities? In the United States, there is a program for supporting workers who have lost their jobs because of low-priced foreign competition. Up to now, the experiences with it have not been particularly positive; one reason is that the system is extremely bureaucratic.
The discussion of these issues has just begun in the G20 task forces. So the first challenge is to collect the large sums of money required for the grand experiment. For almost four hours, there was talk in Chengdu about how states could increase their tax revenues. Finance Minister Tharman Shanmugaratnam of Singapore would like to tax rich owners of real estate, while his South African colleague advocates a more effective fight against tax havens.
For his part, Mr. Schäuble is using the window of opportunity to propose an idea that has long occupied his attention: the introduction of a global tax on financial transactions.
He see three advantages in this approach. It accesses additional sources of revenues. It makes clear that politics is taking on the financial industry. And it grasps hold of an issue with which the rival Social Democratic Party could otherwise score points in the upcoming German legislative elections.
Up to now, all attempts to implement such a tax have been resisted by the Americans and British and there wasn’t even a majority for it in Europe.
But much that seemed carved in stone yesterday is subject to negotiation today.
Mr. Lew recently supported a G20 initiative for stopping tax evasion by international companies. A few years ago, this as well was considered to be impossible. And the new British Chancellor of the Exchequer, Philip Hammond, has revoked his predecessor’s proposal to lower corporate taxes after Britain leaves the European Union in order to lure companies from the continent. Even in the Anglo-Saxon world, scarcely anyone still seems to believe in tax reductions as a cure-all.
Mr. Fabig of Germany’s Finance Ministry thus has one less worry. He is already preparing for the next summit. In the coming year, Germany will take over the presidency of the G20. Then the heads of state and government will meet in Hamburg. At the Finance Ministry, the concern is to prevent at any price Mr. Trump, Mr. Grillo and Ms. Le Pen from being present at the table.
This article first appeared in Die Zeit. To contact the author: email@example.com