Do New Technologies and Globalization undermine Democracy?

Many believe that both globalization and new technologies have helped to undermine democracy by driving the growth of inequality. The view that technological change and democracy are necessarily incompatible is, however, misplaced; while the current wave of populism should give rise to great concern, it should also be understood as a chance to make democracy more responsive and therefore more resilient. This is best achieved through better policy design, carefully managing the distributional consequences of technological change, so that everyone can benefit.

The recent rise in populism as best evidenced by Trump’s election and Brexit has re-invigorated a debate on the distributional consequences of technological change and globalization – a debate that, in fact, had long been overdue. The current crisis of democracy is to a large extent the product of escalating levels of inequality, caused by globalization and technological progress. Inequality undermines democratic resilience; it increases political polarization and decreases social cohesion, leading to diminishing support for democratic institutions. An inverse relationship seems to govern economic and political equality, so that as the one grows, the other withers, becoming an increasingly unattainable ideal; access to and influence over policy diminish for poorer citizens, and democracy ceases to be responsive to their demands and needs. In academic circles, declarations of the end of democracy abound – as most immediately evidenced in book titles such as How Democracy Ends (Runcimen 2018) and The People Vs. Tech (Bartlett 2018). And so technological progress and democracy are, it would seem, ultimately incompatible.

Until recently, however, the overwhelming consensus was the opposite. It was assumed that technological innovation and trade liberalization increase productivity and overall economic welfare, both in the developed economies and the emerging markets. The losers of globalization were assumed to be relatively few in number and their discomfort only temporary; they would face a short adjustment period before finding a new job in line with their skills set. However, this optimism seems increasingly misplaced. It is now commonplace to argue that technological change and free trade should be seen more critically, creating a clear set of winners but also a clear set of losers. Therefore, public debate has largely shifted to the following sets of questions:
Firstly, can the losers of technological advance and globalization be compensated through carefully designed policy schemes? And secondly, what kind of policy design is needed to tackle precariousness and inequality effectively?

To answer these questions – and gain a more accurate understanding of the complicated relationship between technology and democracy- we must understand the size of the problem; who the losers are; and what ultimately drives inequality, whether technological progress or globalization, or both – or neither.

Let’s look at the combined effect of technology and globalization on inequality first. Overall, cross-country inequalities have reduced significantly, which is largely due to the economic success of emerging market economies such as China and India. In those countries, millions of people have been lifted out of poverty into a growing global middle class. In fact, even those in the bottom third of the global income distribution have made significant income gains, with real incomes rising between 40% and 70%. As a result, the number of the absolute poor has decreased from 44% to 23% within the last two decades (The only exception to this are the world’s poorest 5%, who have made no gains). (Milanovic 2012). These data confirm the view of economists such as Adam Smith and David Ricardo that technological progress and free trade can benefit every party involved by enabling each to focus on their comparative advantage. It is not a zero-sum game where one party’s success necessarily comes at the expense of the other party involved.

But this is only half of the story about the distributional consequences of new technologies and globalization. So far we have only looked at cross-country inequalities, and not at inequalities between citizens in a given country. Hence, we could not make any predictions about the income distribution there. Within-country inequalities have been increasing nearly everywhere, not just in the rich economies but also in the developing world. In the US, the wealthiest 1% now claim 20% of the national income compared to 11% in 1980. Similar trends are happening in developing countries, such as the so-called BRICS economies. In Russia, for example, the richest 1% now possess as much as 20% of national income, which compares to only 4% in 1980 (Frankel 2018). Within-country inequalities have been increasing primarily because it is the global middle class – those located between the 75th and 90th percentile of the global income distribution – who could not benefit and saw their real incomes stagnate (Milanovic 2012).

Which factors are to blame for this seemingly universal trend of growing within-country inequalities? Mostly technological change or globalization? As Autor et al. point out, initially technological change rather than globalization was seen as the prime suspect behind growing in-country inequalities in countries such as the US. A number of trends support such a conclusion. First of all, the share of people working in manufacturing in the US had been decreasing since the end of the Second World War. Hence, the disappearance of manufacturing jobs in the developed world was not understood as a recent phenomenon. Secondly, the increase in wage inequalities and the gradual erosion of low-skilled workers’ wages did not map on neatly to the increasing pace of globalization, so that no causal connection was made. Finally, technological change rather than globalization seemed to be a better explanation for the rise in wage inequality. The manufacturing industry in the developed world seemed to have substituted low-skill for high-skill workers, therein pointing to a skill-based demand shift, triggered by the adoption of new technologies (Autor et al. 2016: 2). It is only with China’s surprising and rapid rise to the status of economic colossus that the previously held agreement among economists about the positive redistributional benefits of globalization is increasingly called into question. In their paper, Autor, Dorn and Hanson show how the increased manufacturing competition from China has led to clear, easily identifiable and regionally concentrated losers of globalization. These are mostly industrial workers. The costs of globalization are not just higher than previously assumed because free trade per se has a stronger adverse distributional impact than predicted, but also because labour movements are neither perfectly fluid nor perfectly frictionless; this viscosity greatly increases the costs of globalization for industrial workers in the developed world through incomplete and lengthy adjustment processes. The adverse distributional impact of globalization on regional labour markets is further exacerbated via two channels (Autor et al 2016). Firstly, the negative shock to local manufacturing spills over to other industries. These are often found in the same area. More imports from abroad and less manufacturing at home decrease the domestic demand for other products such as metals, textiles and wood. Another avenue through which the costs of globalization are increased is through depressed aggregate demand. Workers who see their wages stagnate, reduced or even lose their jobs will show less demand for new goods, with deleterious consequences for the regional economy as a whole through the multiplier effect.

To say that free trade has larger distributional effects than previously assumed is not to deny, however, that technological change is also strongly re-distributional. This becomes clear when looking at the within-inequality trends in the emerging market economies. Just like in the rich countries, here inequalities have also been increasing sharply. Technological change rather than globalization seems the more prominent factor in this case. Presumably free trade should have reduced rather than increased inequalities, because the services of unskilled workers in developing countries are comparatively cheaper in an economically integrated world and therefore in higher demand because of the possibility of offshoring. But this is clearly not the case; the only plausible explanation is that technological change has shifted labour demand from unskilled to relatively skilled workers (Frankel 2018).

Both technological progress and globalization seem, therefore, to be significant drivers behind growing inequalities. Their distributional consequences and costs must be mitigated and managed through carefully designed policies. In the past, these policies have been largely absent or too small in scale; they have also had unintended and ultimately counterproductive consequences. For example, there have been scant adjustment policies in the form of temporary monetary assistance and retraining programmes, and those that have been implemented have been under-funded and poorly designed. The European Globalisation Adjustment Fund only provides funds for retraining programmes, but not for temporary monetary assistance; stringent eligibility criteria also result in it not being used as much as it could be (Dhingra 2018). Furthermore, the success rates of these retraining programmes tend to be low. In the US, it is estimated that one in three participants does not manage to find a new job. With private investment in human capital decreasing, setting up well-designed and effective retraining programmes will increasingly fall within the remit of public policy (Dhingra 2018). Certain jobs, especially those in the gig-economy, will also need better protection so that for workers these do not become a dead end. Regional infrastructure spending also needs to be increased significantly, especially in those industries and areas that are exposed to significant levels of foreign competition; the opening of local colleges can play a key role, teaching the use of new technologies and also offering a site for retraining programmes.

Most importantly, regional infrastructure spending should not take the form of regional transfers between poor and rich regions, for two reasons. First, in the long run these become very difficult to publicly justify, especially on a permanent basis. A case in point is the large financial transfers from West to East Germany after reunification. Secondly, such transfer are often inefficient. Their effects –an invigorated local economy and lower unemployment rates – often last only as long as there is state-funding. What’s more, generous safety net policies in the form of unemployment and health benefits have often perpetuated regional inequalities in the past, enabling the poorest to stay in the so-called left behind communities where once they would have needed to move (The Economist 2017). Therefore, public policy should emphasize temporary relief policies, retraining programmes and regional infrastructure spending rather than redistributional schemes.

Growing levels of precariousness and inequality pose a serious policy challenge and will continue to do so for the foreseeable future. If this challenge is not addressed, economic inequality will further increase, therein undermining democracy even more. But this outcome is not inevitable. The populist clamour, whose growing volume is provided by the voices of the so-called losers of technological change and globalisation, is a real opportunity to devise new policy schemes to tackle inequality; if those policies are made carefully, with focused thought on their intended beneficiaries, democracy can be reinvigorated.

Bibliography
Autor, D., Dorn, D., Hanson, G. (2016). ‘The China Shock: Learning from Labour Market Adjustment to Large Changes in Trade.’ The Annual Review of Economics, vol 8(1).
Bartlett, J. 2018. The People Vs. Tech: How the Internet is killing democracy (and how we save it). Ebury Press.
Dhingra, S. (2018). Trade creates losers. Here’s how to help them. The Economist. Online. Available at: https://www.economist.com
Frankel, J. (2018). Do globalisation and world trade fuel inequality?. The Guardian, 2 January. Online. Available at: https://www.theguardian.com/business/2018/jan/02/do-globalisation-and-world-trade-fuel-inequality.
Milanovic, B. (2012). The Real Winners and Losers of Globalization. Online. Available at: https://www.theglobalist.com.
Runcimen, D. (2018). How Democracy Ends. Profile Books.
The Economist. (2017). The Right Way to Help Declining Places. The Economist, 21 October. Online. Available at: https://www.economist.com.