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The decline of traditional labour spells danger for the global economy

Professor Kaushik Basu

Challenges for a global economy

In a special lecture for Monash Business School, former World Bank chief economist Professor Kaushik Basu explains that the rise of the machines can’t be halted, why protectionism is wrong and the true dangers for the world economy.

Radically reshaping the global economy

Former World Bank chief economist Professor Kaushik Basu recalls exactly his first inkling of the forces that in time would radically reshape the structure of the global economy.

In August 2011, when he was still chief economic advisor to the Indian government, Prof Basu’s phone rang repeatedly. “Standard & Poors has downgraded the US,” a journalist told him.

The ratings agency had cut the AAA credit rating of the world’s largest economy for the first time. It issued a sharp critique over the “political brinksmanship” that had gridlocked any resolution of its rising debt and threatened a default.

As the World Bank’s chief economist from 2012 until the end of his term in September, Prof Basu has had a front row seat to the global changes being wrought by an intersection of politics and economics.

Now Professor of Economics and the C. Marks Professor of International Studies at Cornell University, Basu visited Australia to present “Challenges for the Global Economy: The Great Recession and the Fault Lines” for the Centre of Development Economics and Sustainability (CDES) at Monash Business School on 29 November.

“After the (US downgrade) crisis began, there was global uncertainty,” Basu told the audience. “What would happen to the global economy?” It was expected such uncertainty would prompt foreign investors to begin withdrawing their money from emerging economies such as India, South Africa and Philippines. 

But an interesting thing then happened. Those funds began flowing into the US.  Even though the US was the source of the problem, investors surmised that this was still where their money would be safest. 

Uncertainty the new certainty

Five years on, the global economy has been buffeted by dropping commodity prices and a plunge in the oil price. Interest rates sit at historic lows around the world (including Australia), while Japan, the European Central Bank (ECB), Denmark, Switzerland and Sweden have resorted to negative interest rates. The US Federal Reserve and the ECB have implemented quantitative easing to boost growth.

Politically, there has been a rise in ultra-nationalistic politics that saw the British vote to the leave the Eurozone, while Donald Trump was elected as US President on a promise of “making America great again”.


But in his speech, Prof Basu argued that protectionism is not the right approach to counter the undesirable aspects of globalisation. Rather, radical approaches – such as workers earning a ‘share’ of company profits - must be considered to grapple with the disruptive way technology is eroding wages.

He has also called for a collective approach by advanced economies to raise interest rates, arguing the negative interest rates have failed to deliver growth and in fact risk further long-term detrimental impacts to the global economy.

Negative interest rates have “failed”

Prof Basu told the audience while he initially believed cutting interest rates was the right approach. But he now feels it has failed. “They have gotten into a low equilibrium trap from which no single country can get out of because it’s a globalised world that we live in,” he said.

Yet the paradox of very low interest rates is that people tend to save, rather than spend more as they grow increasingly concerned about their retirement income.

Even as the US now considers raising its cash rate in December, there are concerns the resulting appreciation of the US dollar will impact on its exports.


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Professor Kaushik Basu

Kaushik Basu is a Professor of Economics and C. Marks Professor of International Studies at Cornell University. He served as Chief Economist and Senior Vice-President of the World Bank from 2012 to 2016. Before taking up this role he was Chief Economic Advisor to the Government of India. Prof Basu has published papers on development economics, welfare economics, industrial organisation and game theory.

Creating a ‘share’ economy 

Prof Basu called for major economies with negative interest rates to commit to raising rates by 25 to 50 basis points over 12 months. Prof Basu points to other global agreements such as the nuclear non-proliferation treaty and the Paris Climate Accord as evidence that countries can act in concert for the greater good.

But he admits it is a difficult ask. “It takes a lot of soul-searching for countries to say that ‘even though it may not be good for me, collectively we need to do something, so I will join in.’”

Technology and the decline for traditional labour


However, he says there is a deeper problem beneath the surface of the global economy. Declining demand for traditional labour links economics to the rise of arch-nationalism politics around the world.


Technology is at the heart of this. Jobs formerly done by humans are now being replaced by robots. Prof Basu cites an example of a highly automated manufacturing plant in the US that operates in virtual darkness as there is no need for the lights to be on.

Labour-linking technology that allows jobs to be performed more cheaply in distant countries, is another issue that has become politically heated.

But he argues the issue isn’t technology. There is very little to be done to counteract the rise of the machine. And preventing the outsourcing of jobs can have unforeseen consequences of making a high-cost country uneconomic against its cheaper competitors and actually costing the jobs it seeks to protect.

The erosion of wages and income inequality


The main problem is that this is a revival without jobs being created. This has eroded workers’ earnings, while benefiting the rich who own the assets.

The effect on workers’ earnings is striking: workers’ share of GDP (earned as wages) has significantly declined.

In 1975 in Australia, workers’ share of GDP was 66.5%. In 2014, it is down to 54.2%. In Canada it has fallen from 60.6% to 55.4%. while the European Union is down from 66% to 56.7%. This has been the trend for advanced economies across the board.

One approach that has gained some traction is the idea of a universal basic income – where all citizens receive an unconditional lump sum from their governments or a public institution.  This is being trialled in Finland. 

Prof Basu is more in favour of the ‘share’ economy, a concept first written about in 1984 by MIT economist, Martin L. Weitzman which suggests workers “share” the profits or revenues of the companies they work for.


“This has to be done carefully, but I believe advanced countries have to think increasingly think about percentage of profit should be owned collectively by workers as a share. Say 10 per cent of profit generated by the workers in Australia goes into a box which is money for the workers,” he said.

“So every time you have technology that is causing profits to balloon a part of that is going to workers in terms of shares they have in the enterprise of this country.”

Prof Basu concedes some of these ideas sound radical. But relieving people of the drudgery of some jobs is actually desirable.

“Increasingly the world’s total hours of work will shrink, so we will have to learn to spread them,” he said.  

We must find to share more widely the benefits of higher growth enabled by the advance of technology.


Professor Kaushik Basu was a guest of the Centre for Development Economics and Sustainability, Monash Business School.

​By Helen Westerman