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Free Trade’s Diminishing Returns

Given more than a decade of stagnant and falling incomes across the developed world, policymakers in advanced economies may want to reconsider growth policies based on free trade. Meanwhile, policymakers in the developing world should be especially wary of the non-trade provisios included in recently proposed free-trade agreements.

KUALA LUMPUR/MOSCOW – In its May 2010 “Global Survey,” McKinsey & Company reported that, “the core drivers of globalization are alive and well.” In an April 2014 report, the firm went further, declaring that, “to be unconnected is to fall behind.”

But now McKinsey seems to have changed its tune. In a new report, “Poorer Than Their Parents? Flat or Falling Incomes in Advanced Economies,” the McKinsey Global Institute asserts that developed countries should not expect further gains from the process of globalization. Income growth has stalled since the 2008 financial crisis and “even a return to strong GDP growth may not” reverse the trend.

Specifically, McKinsey finds that, from 2005 to 2014, real (inflation-adjusted) incomes remained flat or fell in 65-70% of households comprising 540 million people across 25 advanced economies. In the United States during this period, 81% of the population experienced flat or falling real incomes; in Italy, 97% did. By comparison, from 1993 to 2005, advanced-economy real incomes remained flat or fell in less than 2% of households.

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