MOUNTING anxieties among the middle classes across the Western world over threats to their livelihoods from globalisation and the rapid economic rise of India and China risk triggering a ferocious social and political backlash, leading economists gave warning yesterday.

Growing fears over globalisation among millions of people across the West are being fuelled by a sharp squeeze on incomes and living standards as much of the financial benefit from a more interconnected world economy flows into corporate profits rather than earnings, a panel of prominent experts argued at the World Economic Forum's annual meeting in Davos.

The warnings came after Stephen Roach, chief economist of Morgan Stanley, this week highlighted in The Times recent trends that have seen the share of national income in the West that flows to workers drop to historic lows, even as the share flowing to companies’ profits has climbed to a record high.

Robert Shiller, one of the world’s most renowned academic economists and a professor at America’s Yale University, told Davos delegates that these trends were being amplified by the integration into the world economy of India and China. He said that the rise of these twin economic powerhouses was "the greatest economic event since the Renaissance and the Industrial Revolution".

But Prof Shiller and other panellists sounded an ominous warning over the risk that a backlash across Western electorates could spark social unrest and a retreat by leading developed economies into protectionism. He called for governments to raise taxes on the wealthy to counter this danger, so that the proceeds could be used to ease the economic strains now afflicting large sections of Western societies and fostering increased inequality.

"We are reaching a world where there is great anxiety," he said. "This is a critical thing to deal with ... This is a big problem."

Prof Shiller said that the West was "developing a powerful class of people who will be doing very well", but there was intensifying stress on "the people who will be left behind".

He said the political challenge of tackling these issues was all the more pressing since "once inequality increases it’s a problem that will be with us forever".

"The political discourse about this problem is way too low," he added. "We really need in every major country a serious debate about how we are going to stop this inequality getting worse. And do it now, not after it has created all of these problems."

The Yale professor’s analysis was echoed by Nouriel Roubini, a leading US economic consultant, who agreed that "lots of losers" were emerging from the effects of globalization in the West. "You have this process of increasing income and wealth inequality," he said.

Prof Roubini said that the problems in America were being amplified by the impact of tax cuts by President Bush which he argued had been "highly regressive".

"The old social contract that existed in some senses in the US is breaking down exactly because of rising China and rising India," he said. "But that means if you want [to avoid] a backlash against it, you need a much stronger role for the state.

"If a safety net does not exist then the backlash is going to be more nasty."

As well as backing Prof Shiller’s call for higher taxation of the wealthy, Prof Roubini argued that Western governments needed to devote greater resources to retraining workers whose skills were being made redundant by cheap labour in China, India and other emerging market economies.

Zhu Min, the executive vice-president of the Bank of China said that Beijing was pursuing a policy to ensure that we try to make everybody have a better life every day". But he said that even in China income inequality was rising. "In China it’s getting worse but it is true in the US too," he noted.

The economists said the globalization was also raising other risks to prosperity, with mushrooming capital markets creating escalating dangers from excessive use of leverage by financial institutions including hedge funds.

Prof Roubini said that the very rapid expansion of credit through derivatives markets was heightening the threat of "something ugly and systemic happening".

He said that policy-makers should be concerned by a lack of transparency by hedge funds and other institutions, and the reality that activity in markets was becoming more opaque.

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