Seun Oyeniran: Brexit, Trump, China, Globalization and A Case for Nigeria

Hillary didn’t win the USA presidential election and Trump is now the president-elect. While many are understandably upset, as individuals we have to move forward. But there is a deeper underlying issue that we need to shed light on as well as provide a case for Nigeria to position itself as we move forward. It’s the issue of the middle class.

There are strong economic reason behind many of what we are observing on the global scene. This piece is not written as an opinion to the US election. The goal is to provide a fresh perspective to current developments. The intention here is to elaborate on less undiscussed yet critical factors shaping what we observed during the US and that government all over the world should pay critical attention to especial developing nations like Nigeria. What we saw first demonstrated in Brexit and more recently in the US election outcome are results of what has been accumulating for many years. Although globalization played a significant role, the core issue has to do with how the middle class has gradually been hollowed out of the global economy. You would have heard many government lay emphasis on the middle class. The Canadian government released its budget in March 2016 and called it “Strengthening the Middle Class”. Despite all the progress recorded globally in the past decades particularly from 2001 to 2011 with nearly 700million people stepping out of poverty, a significant number have plunged back into low income earners. According to Pew Research Center analysis, though there was growth in the middle-income population from 2001 to 2011, the rise in prosperity was concentrated in certain regions of the globe such as China. The middle class barely expanded in places like India, Africa, Southeast Asia, and Central America. Directly connected to the middle class issue is labour wages or labour shares.

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To grossly simplify it, labor share is the ratio of total compensation of employees – wages and salaries before taxes, plus employers’ social contributions – over a national product or income aggregate.  It is a measures the fraction of national income accruing to labour. Both adjusted (after factoring things like family non-paid work, etc) and unadjusted labour shares in selected G20 countries (international forum of leading industrialised and emerging economies accounting for 85 per cent of world GDP and two-thirds of its population) have declined steadily in the past decade. Figure 2 shows this vividly. While labour has continued improve in productivity (with corresponding total factor productivity increase), real wages and compensation have not change as much. The majority of the gains from increasing productivity has been accrued to capital gains. Globalization brought about reduction in the isolation of countries in terms of cross-border trade and investment. Aided by aided by information technology, globalization allowed for the integration of people, companies, government, politics, culture and society in such a way that specific regions. Some regions have been able to build on their comparative advantages and with some elements of mercantilism become production power house. China is one of such countries.

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On December 11 2001, after a 15years endeavour, China joined the WTO to become its 143rd member and further integrating the country deeper into the global economy. China has made an all-out effort to raise the level of science and technology by implementing various international trade policies. China’s Ministry of Science and Technology and its former Ministry of Foreign Trade and Economic Cooperation proposed the strategy of “Trade Vitalization through Science and Technology” in 1999, which contributed to the increase of high-tech trade and the application of high technology to upgrade domestic industries. Since its WTO accession, China has further devoted much time and efforts at reducing and in some cases totally removing trade barriers. China eliminated import quotas, licenses, some designated trading practices and other non-tariff barriers. Automobiles, chemicals and electronics industries which were subject to strong government protection before are likely to experience restructuring due to the dismantling of trade barriers. China also committed to open trade within the service market sector such as banking, telecommunication and insurance allowing foreign investors where they were non-existent before. The newly emerging industries, like telecommunication, banking, insurance, and professional services will be flooded with foreign competitors equipped with leading technology and management skills, and future opportunities for technology transfer exist in these industries.

These developments in China had remarkable trickledown effect on the global economy. Keep in mind that China had the population base to run these emerging structures and reforms (I wrote on demographic advantages for countries with high population here). China quickly gained the most-favoured-nation (MFN) by WTO member due to the exchange for service related offerings that normalized trade relations. Most other trading partners have eliminated restrictions on imports from China which helped promote China’s labor-intensive exports in a large number of industries. Before china joined WTO, global profits shares received by labour was 60% while capital received 40%. Post WTO accession for China result in labour now receiving 40% of global profit while Capital receives 60%. Yet in America, China’s single biggest trading partner, sentiment towards the country has turned starkly negative. In a recent poll, 61% of Americans said that China’s recent economic expansion had been bad for America; just 15% thought it had been good.

As shown in Figure 3.2, China’s international trade volume has grown fast in the last 20 years with an annual expansion rate of 18.1%. It climbed from 20.64 billion dollars in 1978 to 2.56 trillion dollars in 2008, indicating the increasing opening-up of the Chinese economy.

As shown in Figure 3.3, China’s share in global trade and its global ranking have increased steadily since 1979. In 2008, China took up 7.9% in the global trade, and its global rank in terms of trade value was No. 3 (ranked after the U.S. and Germany).

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The above analysis suggests that one of the most remarkable aspects of China’s trade performance was the rapid shift in the composition of exports from resource- and labor-intensive products to capital- and technology-intensive goods. China’s trading structure changed its focus from primary products to light industry and textile products in the early 1990s, and to machinery and electronic goods with high technology now. Processing operations have contributed significantly to the improvement of China’s manufactured exports with massive technology transfer through intermediate goods (see Figure 3 below). It provides evidence that the technological upgrading of China’s international trade has led to the building-up of highly internationalized and competitive industries including the electrical machinery sector.

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There are a few questions that arise at this point? Has globalization only favoured China? Should we discontinue globalization and label it as bad as are already beginning to do? Or is the trend towards globalization inevitable? We have to figure it out somehow.

Here are my reasoning for Nigeria as we move forward:

  1. There should be a massive investment in specific sectors where the country is endowed. Targeted sectors with targeted policy measure. Nigeria should position itself as comparatively advantaged in these sectors and build global competency and market for its products. This will take a huge effort undoubtedly but a government with a strong resolve and outstanding economic team can make this happen.
  1. Total factor productivity (TFP) growth and capital deepening – the key drivers of economic growth – are estimated to jointly account for as much as 80 per cent of the average within-industry decline of the labour share in OECD countries between 1990 and 2007. One possible explanation has to do with the diffusion of information and communication technologies (ICT), which in turn has created opportunities for unprecedented advances in innovation and invention of new (increasingly cheaper) capital goods and production processes. This has boosted productivity but also allowed extensive automation of production and high substitution between capital and labour. Nigeria needs to do two things here. Find ways to attract capitals and build its ICT base. Foreign capitals will be difficult to attract if there is not security and stability. ICT can be a quick win for Nigeria because it has young, tech savvy generation that provide a huge talent pool that can provide long-term economic gain.
  1. The high substitution between capital and low-skilled labour and complementarity between capital and high-skilled labour. Other scholars have advanced the possibility that, within this context, technical change could be even labour-replacing, in the sense that technological progress takes the form of machines replacing tasks previously performed by labour. In turn, this would especially reduce job opportunities for low-educated workers and, in practice, dampen the aggregate productivity of low-skilled labour. Nigeria need to progressively work on improving the quality of its labour force. This touches briefly on education reforms. More critical is the angle of skill acquisition and training for low-educated workers so that they can survive the technical deepening facing almost all industries today. Skilled (technical) labour supply should increases faster, thereby increasing incentives to create capital goods complementary to skilled labour, technical change would remain biased against the unskilled.

Seun Oyeniran is a’Going Global’ Responsible Leadership winner (http://ow.ly/siKWg ), economist, sustainable development advocate and believer that many great things can happen in our lifetime.

Tweet to @seunoyeniran

E-mail: seunoyeniran@yahoo.co.uk

References:

The Labour Share in G20 Economies, International Labour Organization Organisation for Economic Co-operation and Development with contributions from International Monetary Fund and World Bank Group, Report prepared for the G20 Employment Working Group, Antalya, Turkey, 26-27 February 2015 https://www.oecd.org/g20/topics/employment-and-social-policy/The-Labour-Share-in-G20-Economies.pdf

International Trade and its Effects on Economic Growth in China by Peng Sun Liaoning (Entry-Exit Inspection and Quarantine Bureau (LNCIQ)) and Almas Heshmati (Korea University and IZA) Discussion Paper No. 5151 August 2010 http://ftp.iza.org/dp5151.pdf

“A Global Middle Class Is More Promise than Reality.” Pew Research Center’s Global Attitudes Project. Kochhar, Rakesh. N.p., 2015. Web. 27 Nov. 2016. http://www.pewglobal.org/2015/07/08/a-global-middle-class-is-more-promise-than-reality/

“The Inconvenient Truth Behind Donald Trump’s Victory.” Zero Hedge. N.p., n.d. Web. 27 Nov. 2016. http://www.zerohedge.com/news/2016-11-11/inconvenient-truth-behind-donald-trumps-victory

Williams-Grut, Oscar. “SILICON VALLEY CEO: People Are ‘lashing Out’ Because Technology Is Destroying More and More Jobs.” Business Insider. Business Insider, Inc, 2016. Web. 27 Nov. 2016 http://uk.businessinsider.com/zuora-ceo-tien-tzuo-on-globalization-populism-trump-brexit-fourth-industrial-revolution-2016-11

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