Wrenching the globe into a new economic orbit

Wrenching the globe into a new economic orbit

As the world economy is being reshaped by the technology revolution, the resulting transformation is creating a new gilded age and a new plutocracy.

On a bitter evening in mid-January, a group of bankers and publishers gathered on the 42nd floor of Goldman Sachs’ global headquarters in New York. The setting could not have been more New York - skyscrapers twinkled out the windows to the north and a jazz ensemble played softly in the corner. But the appetisers, reflecting the theme of the event, were an international mishmash: thumb-sized potato pancakes with sour cream and caviar, steaming Chinese dumplings, Indian samosas and Turkish kebabs.

The party was in honour of the Goldman thinker who had served notice to the Western investment community a decade ago that the world was being transformed by the rise of emerging markets, in particular, the four behemoths that Jim O’Neill, then chief economist at Goldman Sachs, dubbed the BRICs: Brazil, Russia, India and China.

In a new book that O’Neill has published, “The Growth Map: Economic Opportunity in the BRICs and Beyond,” he argued that the BRIC concept had “become the dominant story of our generation” and described the next 11 emerging markets that are joining the BRICs. But there is another force that is reshaping the global economy today, and the Goldman executives who toasted O’Neill are a reflection of that: the rise, in the developed Western economies, of the “1 per cent” and the creation of what many are calling a new gilded age.

In the 19th century, the Industrial Revolution and the opening of the American frontier created the Gilded Age and the robber barons who ruled it. Today, as the world economy is being reshaped by the technology revolution and globalisation, the resulting economic transformation is creating a new gilded age and a new plutocracy.

The two forces are intricately related. Indeed we are living through slightly different gilded ages that are unfolding simultaneously. The West is experiencing a second gilded age, while the emerging markets, as O’Neill and others have documented, are experiencing their first gilded age. The resulting economic transformation is even more dramatic than that in the Gilded Age. Now, billions of people are taking part across much of the globe, not just the inhabitants of the West.

“It is structurally much more extreme now in multiple dimensions,” said Nobel-winning economist Michael Spence. “Now that the emerging economies are pretty big, this is just a harder problem. It is so different from previous economic change that I think these are issues that we have never wrestled with before.

“In the 200 years from the British Industrial Revolution to World War II there were asymmetries in the world economy, but the entire world wasn’t industrialising and it wasn’t interacting in the same way,” Spence said. These are complex phenomena, he added, “and we should approach them with humility.” The gilded age of the emerging markets is the easier to understand. China, India and parts of Latin America and Africa are industrialising and urbanising, just as the West did in the 19th century, and with the added oomph of the technology revolution and a globalised economy.

The countries of the former Soviet Union are not industrialising — Stalin accomplished that — but they have been replacing the failed central planning systems that coordinated their creaky economies with a market system, and many are enjoying a rise in their standard of living as a result. The people at the very top of all of the emerging economies are benefiting most, but the transition is also pulling tens of millions of people into the middle class and lifting hundreds of millions out of absolute poverty.

The collapse of communism is more than a footnote to the double gilded ages of today Economic historians are still debating the connection between the rise of Western democracy and the Gilded Age. But there can be no question that the gilded ages of today are as much the product of a political revolution — the collapse of communism and the triumph of the liberal idea around the world — as they are of new technology.

For emerging markets, going through their first gilded age while the West goes through its second one makes things both harder and easier. One reason it is easier is that there is a path to follow, and we know that for all the wrenching convulsions along the way, it has a happy ending. The industrial revolution hugely improved the lives of everyone in the West and opened the vast gap in the standards of living between East and West that still persists today.

There were no such models at the time of the Gilded Age — remember that it was the dark satanic mills of the Industrial Revolution that eventually inspired the revolt against capitalism and the bloody construction, by those revolutionaries who succeeded, of an economic and political alternative. But today, the evidence that capitalism works is clear, and not only in the wreckage of the communist experiment.

The combined power of globalisation and the technology revolution have also turbocharged the economic transformation of the emerging markets, which is why O’Neill’s BRICs thesis has been so powerfully borne out. “We are seeing much more rapid growth in developing countries, especially China and India, because the policies and technologies in the West have allowed a lot of medium-skilled jobs to be done” in those countries, said Daron Acemoglu, professor of political science at the Massachusetts Institute of Technology and a native of Turkey, one of O’Neill’s Next 11.

“They are able to punch above their weight because technology allows us to better arbitrage differences in the world economy.”

This means, Acemoglu argued, that the gilded age of the developing world is proceeding much faster than it did in the West in the 19th century. “In the 1950s, labour was cheap in India, but no one could use that labour effectively in the rest of the world,” he said. “So they could only grow going through the same stages the West had done. Now the situation is different. China can grow much faster because Chinese workers are much better integrated into the, world economy.”

To be sure, the gilded age in the developing world has its Strains and conflicts. Now that television and the Internet can bring to vivid life the economic gap between a factory worker in, say, Brazil, and the things the middle class takes for granted in the West, even economic growth of 5 per cent or so might feel too slow. That will be especially true when the rich in developing countries live a life of 21st-century plutocratic splendor, including perks like a private jet or heart bypass surgery that would have dazzled a Rockefeller or a Carnegie.

Just as the machine age transformed an economy of farm labourers and artisans into one of combine-harvesters and assembly lines, so the technology revolution in the West is replacing blue-collar factory workers with robots and white-collar clerks with computers. At the same time, the West is also participating in the gilded age of the emerging markets.

Those who own companies in Dallas or Dusseldorf now employ many of the urbanising peasants of the emerging markets. That is good news for the plutocrats in the West, who can reap the benefits of simultaneously being 19th-century robber barons and 21st-century technology tycoons. But it makes the transition even harsher for the Western middle class, which is being buffeted by two gilded ages at the same time.

A survey of about 10,000 Harvard Business School alumni released last week illustrated this gap. The respondents were very worried about US competitiveness in the world economy — 71 per cent expect it to decline over the next three years. But this broad concern looks very different when you ask how workers will fare in the transforming global economy, and how companies will do: nearly two-thirds of the Harvard Business School grads thought companies would be less able to pay high wages and benefits, while less than half worried that American corporations would be less able to succeed.

“When a company is stressed and has issues, it has a much greater set of options than a US worker does,” said Michael Porter, the professor who led the study. For the Western middle class, the options are more limited. “It is easy to say, get more education, but if you are 40 or 50, it is hard to do,” said John van Reenan, head of the Center for Economic Performance at the London School of Economics. “In the last 15 years, it is the middle classes who have suffered.”

VarriRfienan, who is teaching at Stanford Business School in California this month, said these tensions had been building for years, but had been exacerbated by the financial crisis. That, he said, has brought a wave of populist protest, including the Tea Party on the right and the Occupy movement. These two gilded ages are speeding each other up. “India’s gilded age is going to be a combination of America’s first gilded age and the second gilded age,” Ashutosh Varshney, a professor of political science at Brown University in Rhode Island, said at the World Economic Forum in Mumbai in November.

“India is going through this phenomenon in the 21st century,” while “the pace at which information traveled in the 19th century was very different,” said Varshney, who was born in India and spends half of his time in Bangalore. “Today, 800 million Indians are connected through mobile phones.” The two gilded ages can also get in each other’s way: As good an explanation as any for the 2008 financial crisis is that it is the result of the collision between a gilded age in China and one in the West. The financial imbalances that are an essential part of China’s export-driven growth model played a role in inflating the credit bubble that burst with such devastating consequences in 2008.

The two gilded ages have a lot in common, and they are reinforcing one another. But both transformations are creating intense political and social pressures, partly because change is always hard, and partly because the rewards of this sort of convulsive shift are so unequal. Moreover, this time around, the whole world no longer has the escape valve which, at least for a time, released some of the pressures of the Industrial Revolution: Europe’s huddled masses could emigrate to the New World. Even with that option, it is worth remembering, the conflicts and inequities created by industrialisation and urbanisation were ultimately resolved in the West only after a half century of revolution and war.

“It depends on your time horizon,” Van Reenan said. “After all, the Great Depression and World War II were a massive cost to humanity. Eventually, humanity will prosper. Capitalism does work, but over the medium term, 30 or 40 years, there could be incredible dislocations.”