The Gig Economy, Secular Stagnation and Sir Arthur Lewis

21st Annual Sir Arthur Lewis Lecture by Avinash Persaud

Good evening.

At the age of just 33, Sir Arthur Lewis became the first black man to hold a Professorial Chair in a major British University. He went on to become the first development economist to win the Nobel. He was the first black man to win the Prize in the sciences. He was the first West Indian. Nothing more needs be said to explain the honour and pride I have in giving a lecture in his name; and doing so in one of the great institutions of Caribbean integration, an effort dear to his heart. But I will say more. My intention tonight is to show how the ideas of this great West Indian, help us understand the 21st century, global development and the new Gig economy; and how his ideas can help us improve the lot of humanity, his central passion.

We are living in the age of “Trumpism”. Borders are returning. Brexit beckons. Nationalists triumph at the polls and rattle their sabres.  Next year in the land of liberte, egalite and fraternite, Marine Le Pen’s National Front will win the first round of the French Presidential elections. To dismiss Trumpism, as merely the last gasp of misogyny and racism at the departure of America’s most successful President, is to miss the wider picture and to be dangerously complacent over what comes next. Though these events are current, our malaise is not a modern one only to be understood in terms of millennials and social media. It was foretold, in Sir Arthur Lewis’ tale of growth under unlimited supplies of labour, written in Manchester in 1954, long before the Internet was imagined.

There is no better way to mark the brilliance of a social scientist than to use current data to illustrate a theory he expounded sixty years previously. This is what we are going to do today. Only a small fraction of economists win the Nobel and only a small group of those would past the test of data. It is a measure of the man that would please Sir Arthur as he was a strong believer in the scientific method. He witnessed first hand the development of it when he was teaching alongside Sir Karl Popper at the London School of Economics in the 1940s.

Banko Milanovic of the Luxembourg Income Centre recently unpacked the data I would like to use today. It tells the story of the most important development in global society and explains our predicament.

Are you of an age, when you can remember the death of Chairman Mao, Nadia Commaneci’s seven perfect 10.0’s at the Montreal Olympics, or the landing of Viking 1, on Mars? Am I stirring distant memories? If you can remember the downing of Cubana Flight 455, Anguilla being granted its own constitution and the announcement of the Caribbean’s first Nobel, then according to Milanovic’s data, within your lifetime, over just thirty years, you have been witness to the largest reordering of incomes around the world in the history of humanity.

Back in 1986, an unskilled worker in the United States earned on average six times what a skilled worker in China received. For most people, where you were born, determined what life you would lead. Economists call this Citizenship Rent: the amount earned by simply being born in one place over another. Mr. Trump calls it when America was Great. Thirty years later that wage gap between the unskilled of America and the skilled of the developing world has not shrunk; it has disappeared. Citizenship rent is being corroded.

This happened as a result of one more example of being careful of what you wish for. When the cold war ended in 1989 with the collapse of the Berlin Wall everyone rushed to declare “je suis un capitaliste” and open for business. The triumph of capitalism led to the return of internationally mobile capital and goods and lengthier supply chains. The effect was to enable owners of firms to operate as if there was an unlimited supply of labour. Investment and production chased lower wages around the world, leaving secular stagnation elsewhere. What was once made by steel workers in Gary, Indiana, for a premium, could now be made better, faster and cheaper in Guangdong, China. What transpired was a giant reshuffling of global production and incomes.  

Over the past 18 months, Donald Trump, Bernie Sanders have introduced us to the losers of this Detroit shuffle. Blue-collar workers from election night’s battleground states, experienced no increase in real incomes across the last 30 years. The world passed them by. The American dream left them.

But this isn’t just the familiar story of the rust belt and China. Once mobile capital had deconstructed companies, from places where local production took place, to places from where the international assembly of production was organised, it was a logical extension for technology to further deconstruct the employment contract. It has been estimated that in a few years time, half of the US workforce and many elsewhere will operate in the so called “gig” economy. In the gig economy, workers are individual contractors on websites that make no commitment to future work or pay and certainly don’t offer medical benefits and training. If these are employment contracts, they are zero hour contracts, making a mockery of unemployment statistics.

Before, the firm was the economic unit, the unit of production and decision making. Today, the economic unit is the individual. Those who assemble stuff together or just individual consumers are able to see and buy the cheapest private contractor of that service or skill locally or globally. This is good if you have rare skills. The internet connects you to new customers. It is bad for those with common skills. Competition drives down their hourly wages.

Governments of all hues told these less well qualified, that it was their fault. The State increasingly pushed these losers off welfare, reduced their medical benefits and put their kids in sinking schools. There was for a while a youthful excitement around the privilege of working from home in your pajamas; for longer hours, less pay and with no pension or health plan, no canteen and not even an IT desk. The blow was initially cushioned by cheap imports, cheap credit to buy them and distracting wars. The global financial crisis of 2007 to 2009 revealed how these temporary indulgences were papering over fundamental fault lines[1].

Donald Trump and the Brexiters told these losers that it wasn’t their fault. It was Mexico’s; or China’s or the fault of all past, current and future trade deals. Like a bad Hollywood sequel, he told them that if only they took back what was theirs from shady looking foreigners, America would be great again. No wonder the unswayables stuck to their man. He is unlikely to stick with them. Getting elected is not the same as governing. But whether he does or doesn’t, the genuine despair and anger of his supporters will be there.

As long as companies could pull new workers from Brazilian, Chinese and Indian villages or people in advanced economies could hire out their cars, homes or themselves by the hour, over “Uber”, “airbnb” and such like, the economy could grow with profits rising but real wages flat lining. This is what Sir Arthur predicted back in 1954. He further argued that the countries, like America and Britain whose firms chased returns and production abroad would suffer from the stagnation of local investment.

In these circumstances he argued that there was a case for protectionism of local industry through limits to the imports of foreign goods and the export of local capital. This became the development ideology of many newly independent countries that he and his acolytes advised in the 1960s and 1970s. The benefits of cheap imports would be lost, profitability and maybe investment would fall, but the decline in Citizenship Rent might be slowed. The problem is real but I doubt such solutions bring sustainable benefit. There best chance of success of these strategies lay in large states like Brazil, Russia, India and China. But they eventually abandoned this route and received a growth dividend. In the case of small states who live off trade, these solutions distract politicians and the public from the only long term surety of economic progress, which is meaningful and global competitiveness: producing stuff that foreigners want to buy at a premium.

But we must also consider something that was not foretold. The reshuffling of global production directly led to the Great Uplifting. In these 30 years, 1 billion people were pulled out of the misery, inhumanity and nastiness of poverty. One Billion. Never before have so many lives been transformed. Most of these billion people were in Asia, in China yes, but also across many other countries where there were large number of workers migrating from the countryside, where mass education, good transport and legal certainties were available.  

There is a third and final part of the story according to the income data. The people who enabled this great reshuffling of production and incomes were the professional classes in the advanced economies: lawyers, accountants and bankers. In unguarded moments they will say they were doing “God’s work”. Remember the one billion they would say. But they charged more than a few bits of silver for their work. The commission paid to this professional class for every $1 of extra income that went to the billion of poor workers, was an embarrassingly cavenous 44 cents. Twelve percent of all Americans and in other advanced economies fall into this group of professionals. We know them. They earn $150,000 a year plus. This small, self satisfied group, multiplied by their fat wallets, have driven the market for luxury brands skywards and made blue collar workers angrier still.

It is important to see the story in the round. A small elite managed the global reshuffling of production, away from the advanced economies to developing countries. The elite made off like bandits. Blue collar workers in the advanced economies stood still. One billion people were lifted from poverty. The national politics is bad, but the international economics is less so. And not just the economics. From the perspective of global development perspective; from a utilitarian perspective of the greatest good for the greatest number; from a moral perspective; If the way to pull one billion people out of poverty was to pay a few bankers a lot to get it done, and for a few hundred million people, who were in global terms overpaid for their skills and comfortably well off, to stand still while the 1 billion caught up with them; then that would have been the right thing to do. Every time. Lifting one billion from poverty is priceless. The Great Uplifting might have been bettered but it was not to be resisted.

It is striking therefore that many of the intelligentsia in advanced economies did try to stop the Great Uplifting by pushing for efforts to force China’s exchange rate higher. Brandishing economic models that did not predict China would grow faster for longer than any other country and could not help them lift sustainable growth at home, liberal economists argued that China could grow faster still of only the Chinese revalued their currency in a manner that a decade before had shoved the Japanese economy into a vicious deflationary cycle. The Chinese smelled a trap. They resisted the pressure for about as long as they could and before hand, without enslaving foreigners or plundering other lands, they achieved the biggest stride in economic development in the history of mankind.  

The Great Uplifting poses two big questions. First, was it just a small step adjustment? Sir Arthur Lewis argued that as more people were pulled in to the formal sector in developing countries there would be a step up in their real wages reflecting the transference of new skills and normalities. He thought of it as a small cliff, not an everlasting escalator. Unlimited supplies of low skilled labour would stop wages catching up. Will the favourable trends peter out and developing countries get tangled up in a middle income trap? Many emerging countries seem to have lost their previous momentum. The second question is whether the Great Uplifting could have taken place without the stagnation of the incomes of unskilled workers in the advanced economies. Was the Trumpish backlash inevitable or avoidable?

I think the answer to both questions can be found in an analysis of how the global elite managed to do so well for themselves. This group championed the removal of all barriers to the easy movement of goods and capital. Unshackle the global economy and move government aside they yelled. They claimed to be self-made men. They chastised protectionism as corruption at worse and subsidies to the wasteful and inefficient at best. Like all popular movements there was an element of truth about this. On closer examination, however, their own success hinged on a sophisticated form of protectionism based around services not steel.

Let me explain. At the same time as the great reshuffling was going on and the bankers, lawyers, accountants, and other business professionals like real estate agents and PR executives who helped to organise it were making off like bandits, the costs to going to college to become one of these professionals sky rocketed. These fees acted like a large tariff against the spread of the benefits of a professional education to a wider group. It was classic protectionism against cheap imports.

The returns to this professional education were then enhanced by the international spread of legal, accounting and banking standards into global codes and standards.  There is today an imperial preference of codes and standards emanating from the North. Although the stated intention is to raise standards everywhere the manner of doing so has been discriminatory and protective of this Northern elite. Anti money laundering and de-risking rules, for instance, do not lead to a diversification of activities away from the well known centres of money laundering like London, Zurich and New York. They have instead led to increased concentration of financial activity there. A recent EU study estimated that the underground economy represented 35% of EU GDP, much of it is banked locally, yet we also know that there have not been and will not be any severing of correspondent banking relationships of the major EU banks.

Having secured a rich seam of work, the global professional class then influenced policies that allowed them to protect and enhance their wealth. They pushed for easy monetary polices that supported financial and housing assets, which they were own disproportionately. They pushed for reductions in the top rate of taxes least it demotivated them. New analysis suggests that as much as half of the widening of the income distribution in the US and UK followed the steep reductions in marginal tax under Reagan and Thatcher which came long before increased international trade. President-elect Trump for instance, the son of a real estate mogul, was a major beneficiary of these policies. The argument that he was the champion of blue collar workers against the global elites only makes sense in Alice’s Wonderland. The education of America has just begun.

My main point is that the developments in education, monetary and fiscal policy aggravated the reshuffling of global incomes, but they were not essential to the repositioning of global production that brought about the Great Uplifting. They could be reversed without jeopardizing it. Higher property taxes could have been used to fund reductions in the taxes of the less well off, not those on the highest incomes, or could have more profitably funded widening access to professional education beyond the top 12%.  

Let me end by drawing some broader conclusions from these observations. In the past, our governments thought that development was about attracting new foreign investment and giving incentives for firms to invest. But the mobility of firms and capital, and the resulting deconstruction of the economic unit from firm to individual, changes all of that. We can only develop, if we develop the assets and skills of our individuals. And because unlimited supplies of unskilled workers caps real wages, we can only truly develop, if we develop the assets of our least skilled people. This is a challenging idea but it is also a liberating one.

In this region the challenge is not to convince people of the importance of education. Sir Arthur’s dictum that the fundamental cure for poverty is not money but knowledge has become a universal mantra in the Caribbean. The problem is that we in the Caribbean and in many developing countries we have been pouring money into a old British-sourced educational system that the Brits have long since abandoned themselves because it was designed to educate the elite and disarm the rest. For too long we have concentrated our efforts and resources on the top 12% who do well at common entrance, end up in our better schools and colleges before migrating abroad when it is the quality of the discouraged 88% that will determine our sustainable development.

Moreover, education is still thought of as something that people do at the beginning of their lives. The lessons of the gig economy is that the acquisition of skills is not an activity of the young but something that has to be continuous if you do not want to end up trying to walk up the down escalator. An 21 year old with skills is in 10 years a 31 year old with out-of-date skills. This is not just about money, which is good because we don’t have any more. It is about rethinking what we mean by education, what its objectives are and how it is organised and paid for.

Today, public education is supply-driven. The Ministry, the supplier, determines what education is, who gets it and where. The system neglects the 88% who do not get in to the elite schools. They are condemned by low expectations, demotivated teachers, out of date curricula and unaccredited certificates. I know that education is far more than about jobs and careers. It builds nations. However at a basic level, a better match between skills and jobs probably requires a more demand driven approach to education than we have. Here is a thought experiment. Imagine if you took the entire education budget and divided it by the number of students and gave this money to parents to spend on accredited teachers and schools. In this region you would be giving parents additional spending power of up to $4,000 per child per year. If those parents could choose where was the best school for their kids and could vote with their publicly provided wallet don’t you think 88% of our kids would do better than they do today?

Ladies and Gentlemen, I wish to end on a personal note. I was inspired to become an economist by my father, Professor the Honourable Bishnodat Persaud. He passed away on July 25th of this year, leaving those who knew him bereft. I dedicate this lecture and my career to him.

Thank you.

Avinash Persaud

Emeritus Professor of Gresham College and Chairman, Intelligence Capital Limited,

ECCB, St. Kitts, November 9, 2016.

[1] A term first used by Professor Raghuram Rajan to describe this process.