How does globalization benefit rural Americans

Decoupled financial markets and inequality: shaping globalization!

Putting financial markets at the service of the people

Populist movements pretend to regain control over globalization - by withdrawing from international cooperation. However, the other countries can take countermeasures and form alliances. This can lead to a downward spiral, e.g. in the form of trade wars and tax dumping - to the disadvantage of all.

 

 

Unilateralism also fails to recognize that most of the problems we face today are global in nature: climate change, financial crises and the Ebola virus cannot be stopped by walls. That is why the realization is obvious: We have to shape globalization politically - above all for the benefit of the disadvantaged and future generations. But: do we live up to this claim?

Growing inequality

7 out of 10 people on earth live in countries where the gap between rich and poor is much greater than it was 30 years ago. This includes almost all industrialized countries. While nine out of ten Americans have suffered real income losses since the 1980s, the richest percent now earn a fifth of their national income. The chances of a child rising from a poor background have worsened since the 1980s. His own income prospects are primarily determined by the income of the parents - even more than the child's height is influenced by the parents' genes! The American dream “from dishwasher to millionaire” is only good for Hollywood films. In Germany and other European countries, we have been able to counteract income inequality through social redistribution. However, even in Germany, children from simple backgrounds have little chance of advancement. In most developing countries, too, the gap between rich and poor is growing; especially in the raw material exporting countries of sub-Saharan Africa, in China and in many Asian countries. Dissatisfaction and a lack of prospects are the result; a breeding ground for political instability and migration.

It is therefore time to say goodbye to a common myth: that globalization ultimately benefits all people. Rather, globalization and digitization, automation and migration are depressing the wages of the less qualified. If we do not want the social cohesion of our societies to deteriorate, then we must ensure that everyone is taken with us: "Leave no one behind" - the global community agreed on this in 2015 when the UN sustainability agenda was passed.

Decoupled financial markets

Another common myth was disenchanted by the global financial crisis of 2008: that the free flow of finance makes the economy more efficient. Until 1980, the value of global financial assets roughly corresponded to that of the global national product; in the meantime the ratio is 1:10. International financial flows have also increased: while international trade tripled in the 20 years up to the financial crisis, international financial flows increased ten-fold.

Decoupled financial markets and high inequality are ultimately two sides of the same coin: If incomes are concentrated in the super-rich, then - unlike the incomes of the poor - they do not flow back into the real economy. They are invested in financial stocks on the international stock exchanges. This leads to financial bubbles. It is significant that both before the Great Depression in 1929 and before the Financial Crisis in 2008 inequality rose at a similarly rapid pace.

Developing countries suffer particularly from the short-term nature of international capital flows. After the financial crisis in 2008, massive speculative capital flowed into these countries, which triggered a consumption boom there. After this “boom” phase, we are currently experiencing a withdrawal of this capital; accompanied by currency devaluations, rising indebtedness, bank failures and the risk of sovereign defaults. This threatens to undo the progress we have made in the fight against absolute poverty: it has fallen from 30 percent to less than 10 percent of the world's population since 2000.

Redirecting financial flows - a triad of measures

We must therefore direct resources and capital to where they are needed: out of speculative financial investments, out of fossil fuels, out of tax havens; and purely in the real economy, purely in modern, climate-friendly infrastructure and purely in the development of new markets, especially in Africa. In the next 15 years, more infrastructure will be built than already exists. These infrastructure investments will determine whether our future economic model will be sustainable. This would require an estimated $ 90 trillion annually to be invested in renewable energies, public transport systems, sustainable urban development and connecting rural areas by 2030; two thirds of them in developing countries. How can financial resources be redirected accordingly? We could start with three pragmatic bundles of measures:

  1. Multilateral development banks need to expand the financing of sustainable infrastructure. - To this end, capital increases are currently being discussed in the World Bank Group and the African Development Bank. This could significantly increase the financing of sustainable infrastructure, especially if it is possible to mobilize private funds at the same time, e.g. by taking on more risks, by providing guarantees and by supporting partner countries in improving the institutional framework for private sector investments. The “how” is decisive: public risk assumption must not displace private sector investments; "Deadweight" effects must be ruled out; and private investment must lead to more jobs and be climate friendly. In addition to capital increases, innovative financing would also be conceivable: the ECB could buy bonds from the European Investment Bank and thus strengthen its lending program in the EU and in third countries.
  2. Financial institutions need to take greater responsibility for their investments. - In order to channel capital into sustainable financial investments, speculative trading must be limited, e.g. through a financial transaction tax or strict position limits when trading in agricultural goods on the stock exchange. It is also about more transparency and the disclosure of risks. In view of the goal of decarbonising the global economy, many financial investments in fossil fuels could turn out to be bad investments (“carbon bubble”). Private investors must therefore receive the right signals for their investment decisions, e.g. through legal requirements for the disclosure of the carbon intensity of financial investments and the identification of the associated risks or through the introduction of a mandatory annual impact assessment for institutional investors to check their portfolio for climate risks and to do so publish.
  3. Increased mobilization of the internal savings of developing countries is required. - Many developing countries have tax revenues of less than 15% of the national product - compared to more than 30% on average in the industrialized countries. That is why they must be included in the G20 initiatives for improved tax cooperation: e.g. in the agreed automatic exchange of tax data and in the disclosure of the ownership structure of companies. In addition, the company's tax data should be broken down by country and made publicly available. This could help civil societies to expose tax evasion. It is also important to mobilize domestic private savings. In many poor countries there are hardly any functioning banks that collect domestic savings and lend them out for investment. Therefore, local financial markets need to be built: by improving legal and macroeconomic frameworks and institutions; by promoting national development banks; as well as through the establishment of deposit insurance systems. After all, we have to prepare for future sovereign defaults. A first step could be taken through a law that limits the claims of "vulture funds" (hedge funds that speculate on the bankruptcy of states), as has already been initiated by Belgium, Great Britain and France.

So there are definitely ways to put the financial markets at the service of the people. The above examples show that economic growth, social equilibrium and sustainability can and must be achieved together. But this requires political will and close multilateral cooperation.