Advanced economies must redistribute income if globalisation is to be a success, Bank of England governor Mark Carney has said.
In a speech at Liverpool John Moores University, Carney calls on governments to target “inclusive growth” that would see more people benefit from globalisation.
Carney says: “To address the deeper causes of weak growth, higher inequality and rising insecurity requires a globalisation that works for all. For the societies of free-trading, networked countries to prosper, they must first redistribute some of the gains from trade and technology, and then re-skill and reconnect all of their citizens. By doing so, they can put individuals back in control.”
While redistribution is limited by “fiscal constraints at the macro level and the need to maintain incentives at the micro level,” Carney warns that “trade and technology do not raise all boats.”
He says: “Consider the disconnect between economists and workers. The former have not been sufficiently upfront about the distributional consequences of rapid changes in technology and globalisation. Amongst economists, a belief in free trade is totemic. But, while trade makes countries better off, it does not raise all boats.”
“The cry for more inclusive growth starts with a crisis of growth itself. To put it mildly, the performance of the advanced economies over the past ten years has consistently disappointed.”
“Weak income growth has focused growing attention on its distribution. Inequalities which might have been tolerated during generalised prosperity are felt more acutely when economies stagnate”
“At the same time as these intergenerational divides are emerging, evidence suggests that equality of opportunity in the UK remains disturbingly low, potentially reinforcing cultural and economic divides.”
“The combination of open markets and technology means that returns in a globalised world amplifies the rewards of the superstar and the lucky. Now may be the time of the famous or fortunate, but what of the frustrated and frightened?”
Carney says that “powerful global forces, including debt, demographics and distribution” had forced down policy interest rates and contributed to deficits in defined benefit pensions. However, he adds that monetary policy was not to blame for this.
He says: “The value of these schemes’ investments in equities and real estate are low relative to the level of interest rates because investors are valuing safety much more than they are expecting faster growth. Said differently, since pensions are future claims on the economy, there isn’t a parallel universe of higher interest rates, higher growth and equity prices, and lower pension deficits. That is, there isn’t without real structural reform. Blaming monetary policy avoids these hard truths.”
Carney also defended the impact of low interest rates on poorer savers as gains from increases in asset prices have offset lower interest income on savings.