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A Cheerleader for Globalization Has Second Thoughts

A new study from the McKinsey Global Institute finds that changes in the world economy have left many people worse off.

For years, the McKinsey Global Institute has been leading the charge for globalization, publishing research on the virtues of free trade, open data flows, cross-border investment, and liberalized immigration.  

"The core drivers of globalization are alive and well," the think tank of American consultancy McKinsey & Co. wrote in a 2010 study, while the world was still recovering from the financial crisis. "To be unconnected is to fall behind," its researchers wrote in 2014.

But a study McKinsey released today stresses that the economic gains of changes in the global economy have not been widely shared lately, especially in the developed world. It's called "Poorer Than Their Parents? Flat or Falling Incomes in Advanced Economies." Prospects for income growth have deteriorated significantly since the financial crisis, the report finds.

Britain's vote to exit the European Union, or Brexit, 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?"

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."

The study found that 65 to 70 percent 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.

The calculation is based on their inflation-adjusted income from work as well as from interest, dividends, and capital gains, but doesn't count the leveling effects from taxes and income transfers such as welfare and Social Security. Taking transfers and taxes into account, 20 to 25 percent of households were in income segments that had flat to falling incomes between 2005 and 2014, the study said.

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