"The Resentment Will Explode" - In Dramatic Twist, McKinsey Slams Globalization
The IMF is getting nervous, and what it appears to be most concerned about, is a collapse of the status quo.
Moments ago, in a speech in Washington, IMF head Christine Lagarde said that "The greatest challenge we face today is the risk of the world turning its back on global cooperation—the cooperation which has served us all well. We know that globalization - and increased integration - over the past generation has yielded many economic benefits for many people."
The IMF is not alone: for years, consultancy giant McKinsey towed the party line as well saying in 2010that "the core drivers of globalization are alive and well" and adding as recently as 2014 that "to be unconnected is to fall behind."
That appears have changing, and cracks are starting to form behind the cohesive push for globalization, at least among those who benefit the most from globalization.
In a stunning study released today, one which effectively refutes all its prior conclusions on the matter, McKinsey slams the establishment's status quo thinking and admits that the economic gains of changes in the global economy have not been widely shared lately, especially in the developed world. In the report titled "Poorer Than Their Parents? Flat or Falling Incomes in Advanced Economies" it finds that prospects for income growth have deteriorated significantly since the financial crisis, and that the benefits from globalization are now over:
This overwhelmingly positive income trend has ended. A new McKinsey Global Institute report, Poorer than their parents? Flat or falling incomes in advanced economies, finds that between 2005 and 2014, real incomes in those same advanced economies were flat or fell for 65 to 70 percent of households, or more than 540 million people (exhibit). And while government transfers and lower tax rates mitigated some of the impact, up to a quarter of all households still saw disposable income stall or fall in that decade.
As Bloomberg reports, Britain's vote to exit the European Union exemplifies what happens when people feel like the system is letting them down, Richard Dobbs, the co-leader of the research, said in an interview Wednesday, ahead of the report's release. He likened the buildup of resentment over globalization to a dangerous natural gas leak in a row of houses.
"One of them will explode. I did not think that it would be the U.K. first," said Dobbs, a senior partner of McKinsey and a member of the McKinsey Global Institute Council in London.
"When we launch a new policy, let’s think about the impact on those groups" who have been left behind, Dobbs said. Sometimes the goals of fairness and efficiency can conflict, he said. "Are we prepared to damage competitiveness a bit to reduce the risk of an explosion?"
To be sure, just like the IMF's U-turn on austerity after the failure of the second Greek bailout, McKinsey was unwilling to admit it has flop-flopped on such a critical position. Instead, Dobbs described the institute's stance on globalization as an "evolution," not a reversal. "We’re not saying throw it all out. ... It’s about a sophistication in our thinking," he said. The McKinsey Global Institute still sees value in offshoring, immigration, trade, and so forth, Dobbs said: "Generally we’re pro those, but there’s a however, and we need to be more aware of the however."
In a startling finding, the report said that 65 to 70% of households in 25 advanced economies were in income segments that had flat to falling incomes between 2005 and 2014, up from less than 2 percent between 1993 and 2005. More troubling is that for some of the biggest supposed winners from globalization such as the US, this number is as high as 81%, while in Italy it soars to just shy of 100%!