RISING TIDES AND SINKING BOATS
The assertion that ‘a rising tide raises all boats’ is a major rationale for fostering economic growth. It's not working out that way. Here's why and what to do.
I’m a child of globalization. My life has been one of growing awareness that the planet we share is only so big and what we do together, or to each other, can either benefit or hurt us as nations, communities and individuals. A bumper sticker I saw recently perhaps best sums that up: “There is no Planet B.”
I was first exposed to globalization in elementary school in the 1950’s when our teachers introduced us to an organization called “The United Nations,” a group of countries that had come together after the end of World War II to talk, not to fight, and to explore how to share this planet peacefully, productively and sustainably. I didn’t grasp the full impact of the United Nations at the time, even though in my middle school classes, we participated in air-raid drills crouching under our desks to protect us somehow if an atomic bomb was dropped on our heads. Clearly the United Nations had work to do.
In high school I became more aware that as nations we had become divided into two global camps - the “free world” and those countries trapped behind an invisible “iron curtain” imposed by totalitarian governments. We studied about how important it was for the US to help ‘non-aligned’ countries develop economically, as well as to support the governments of free-world country allies so they did not fall under repressive rule.
Later, in college, I was exposed to the troubling reality that the US and our adversaries were each using economic and military aid to prop up and protect some repressive regimes to buy their allegiances or at least assure they voted as we wanted at the United Nations. I also learned, however, that such a cold-war them-and-us posture was unsustainable as evidenced by the increasing number of emerging countries and economies struggling with rapidly growing populations with limited resources, weak technical skills and fledgling political institutions to improve their livelihoods. Local home-grown revolutions against colonial masters somewhere in Asia and Africa or corrupt despots in Eastern Europe and Latin America were recurrent events in the news in the early post-war years of the last century. It has been a very bumpy road toward sustainable world peace and prosperity in my lifetime. Many nations have still to arrive.
Throughout the last half of the 20th century, economists proffered that there was a better path for US policy than supporting any country that would wave an American flag with us. Rather, it was in the interests of our nation to create pathways out of poverty for all the world’s citizens.
The theory was that once out of poverty and with opportunities to progress, emerging country populations, firmly ensconced in middle class lifestyles, would recognize that it was in their vested interest to advocate for honest and capable governments to represent and serve them. Equally important, this global effort to achieve long-term economic growth and political stability would come about most easily and rapidly when we dismantled barriers to trade and to flows of financial resources so that all countries could participate in economic prosperity.
Economists have a word for it: “economic convergence.” Poorer nations would begin to grow more rapidly, gradually catching up with relatively slower-growing “mature” developed countries, and gradually close the income and wealth gaps between them. Metaphorically, we economists argued, “a rising tide raises all boats.” Broad-based economic growth would benefit small and large, and rich and poor nations alike.
One of the early assessments of – and challenges to - this claim that global economic growth leads to broad-based prosperity is a book assigned me early in a graduate school economics program. The book, Growth Without Development by Robert Clower and George Dalton, tells the story of why the American company Firestone Rubber, operating in Liberia, produced very few benefits for that country’s population. The research revealed that Firestone had set up an “enclave economy” for its corporate employees, importing most everything they needed from the US. Beyond the low wages paid its Liberian workers, Firestone purchased few products in the local market where those purchases could have stimulated investment, jobs, incomes and, yes, prosperity for its African country host.
The Firestone Rubber story is typical of many others foreign operations around the world, particularly in the extractive industries. The economic convergence goal of such private investments, along with official development assistance from the economically advanced countries, had been to improve the lives and conditions of struggling third-world nations like Liberia. However, only limited economic benefits reached the poorest and the neediest.
On reflection now, I realize I should have been more conscious about one critical assumption on which the “rising tide” theory of economic growth is based: the assumption that those boats don’t have any holes in them. When they do, those boats most likely will swamp and sink.
Today, World Bank and UN data suggest that the gap between the rich and poor countries of the world may indeed have narrowed a bit. Outside of the U.S., Canada, Europe, Japan, and Australia we can point to only a few success stories, where nations have enjoyed greater prosperity with rising global economic tides while also reducing economic disparity among their populations. In Asia we can count South Korea, Taiwan, and Singapore. In Latin America, maybe Costa Rica. Nowhere yet in Africa. Not a very good track record for globalization by any measure!
Troubling, however, are what the data show about trends in widening disparity of income and wealth among the populations within most nations. The United States is no exception.
Why is that? I suspect it’s because we’ve paid too much attention to promoting the rising tides of rapid economic growth and too little attention to patching up those holes that have kept most countries from being more economically and politically seaworthy. Three huge holes warrant particular attention in many nations today:
· Political corruption. When developing country leaders and politically powerful elites are able to siphon off shares of a country’s wealth for themselves, those resources are no longer available to drive national economic growth. What remains is insufficient to make the public investments in education, health and physical infrastructure needed to equip a productive labor force and to provide reliable services – transportation, power, communications – for business investment and growth in employment and wages.
· Bureaucratic incompetence. Governments in developing countries traditionally generated most of their public revenues from duties and tariffs on trade. Globalization required them to dismantle these trade barriers, leaving many countries with no other options but to tax their citizens. However, collecting income, sales or property taxes from the politically powerful and well-to-do in their countries is tough to do. That has left many governments with insufficient public revenues to employ and retain qualified public servants, to staff schools and health clinics, and to build and maintain roads and other infrastructure. The outcome is constrained capacity to compete globally and to avoid being swamped by foreign competitors.
· Political instability. Governments generally don’t produce the goods nor provide the services that enter into global trade today. Private companies and people do. Private interests are willing to invest when there is sufficient political stability and reliable predictability in the product, commodity and labor markets. Absent a healthy, impartially regulated investment and trade environment, private businesses are reluctant to assume risks inherent in producing and growing. Nations with competent leaders and legislators who can deliver political and economic stability are much better equipped to compete in global markets and to assure benefits of globalization for their citizens.
During most of my life, the United States has kept political corruption under reasonable control, has delivered needed public services in a relatively equitable and competent fashion, and has been a respectable model of political stability. So, it is troubling to see recent statements in the American media that our country is starting to look like a “banana republic,” an observation reinforced by clear evidence that we are experiencing a widening gap between America’s rich and poor that is approaching levels of disparity similar to that of many still-developing nations. This should concern us all. And we should act promptly to address it.
Here is the start of a list of steps to consider taking to return our own economy and political system to more shipshape condition – steps we can foster abroad as well:
· Build a labor force with today’s relevant skills. Let’s start with more attention to community colleges relative to four-year degrees programs. Technical skills training should be available to all ages not just those coming out of high school today. Means-tested community college tuition assistance, particularly for those seeking training in critical job skills, opens pathways out of poverty for many who feel they have been abandoned as traditional manufacturing and service jobs have shifted elsewhere or been displaced by technological advancements.
· Foster more responsible household spending and saving. We can begin with inculcating responsible household money management aimed at keeping families out of debt and in their homes. Transparent and even-handed regulation of financial predators, from the big banks to the smaller payday and car-title lenders would support this. More money in consumers’ pockets and more financial security in workers’ households removes the sense of marginalization and festering disenfranchisement that are incubators for political extremism in so many have-not corners of our nation today.
· Hold business socially as well as financially accountable. As investors – even though our retirement account savings may grow a bit slower – we should consider advocating for socially responsible corporate behavior as part of their bottom lines. When employees of the mega retail stores and giant US corporations report that they depend on food stamps to make ends meet, we just may have allowed corporate profit incentives to go too far. In fact, in the case of food stamps we taxpayers actually end up subsidizing big business which otherwise would need to pay more out of sales revenue – and resulting profits - to attract and hire workers at living wages. Today’s nascent ‘public benefit corporations’ movement – which enables businesses to redraft articles of incorporation that include the social impact of their operations along with financial returns on their stockholders’ investments as metrics of performance – is one example to consider as a pathway toward more responsible investment and production.
· Restore respectability and accountability at all levels of government and public service. Government institutions function well when they have earned the trust of the electorate and tax-paying public. That trust is earned by providing needed services in a cost-effective fashion in a timely and equitable fashion. That requires a public sector workforce that is both trained and motivated to perform responsibly and in a timely fashion to meeting providing the services and meeting the needs of their constituents. Let’s begin by no longer bashing bureaucrats who are performing their jobs and turning out of office those who demonstrate they have little respect for those who elected and selected them to serve us.
Much more can be added to this to-do list. The current and following generations must address a range of prickly problems that weren’t global concerns during my youth and professional life. Environmental degradation, domestic and international terrorism and transnational crime are examples of problems to address in these turbulent times. These and other challenges yet to emerge will require a US population trained and equipped differently than my generation.
Still, a good place to start is taking some basic steps toward making the world’s economies more shipshape and better rigged to navigate effectively in today’s turbulent global waters so that we all can arrive at a safer and better place than where we’re at today. ###
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