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November 28, 2000
Why We Don't Have to Choose between Social Justice and Economic Growth: The myth of the equity/efficiency trade-off
Section V
What About Globalization?
To state the obvious, there have been profound changes in the world political economy over the last 25 years: intensified competition and increased integration among the advanced industrialized countries; the increased industrial market share of some developing countries and the consequent cost-competitive pressures on some industries and workers in "the North"; the geographical extension of global capitalism through the collapse of Communism and of Third World economic nationalism; the massive growth of global financial markets; the emergence of truly transnational firms and production networks; and the growing power of international institutions such as the WTO and the IMF with a mandate to promote and enforce "free market" policies.
The emergence of a more classically "liberal" global political economy has changed the terms of the political debate. During the post-war Golden Age, there was, in most countries, a fairly broad consensus in favour of tempering market-driven inequality through progressive taxes and social transfers, and there was support for a more regulated labour market.
Increasingly however, the argument has been that regulated labour markets and generous welfare states stand in the way of growth and economic efficiency. The "stagflation" crisis of the 1970s and the productivity slowdown which dates from the same period were blamed on over-regulation and "inflexible" labour markets. Higher investment based on high rates of return to capital and "business confidence" were seen as the keys to growth, and best secured through low inflation (even at the price of high unemployment), flexible labour markets, very limited state intervention in the economy, low rates of taxation, particularly on capital and high-income earners, and reduced transfers to the unemployed.
The argument has been that change is not only desirable but inevitable. The newly unleashed forces of global competition are held to undermine labour market regulation or progressive income redistribution, particularly through high taxes, since these will result in a loss of competitiveness, capital flight and loss of investment.
Advocates of social equity have had some difficulty framing a coherent response to this restatement of classic liberal economic principles under rapidly changing circumstances. The space for purely national macro-economic policy to secure full employment and stable growth was undercut to some degree by closer capital market and trade integration. Capital mobility and structural changes such as the shift of employment to services and to smaller, non-unionized firms reduced the power and influence of organized labour in both bargaining and the political sphere, resulting in a defensive posture towards existing welfare state institutions. Through much of the 1980s and into the 1990s, politics shifted to belief in "free markets."
In this context, some critics of globalization have argued that global financial and capital markets make full employment, strong unions and generous welfare state institutions a thing of the past with no future, since they undermine profitability and result in lost investment; the WTO and other trade and investment agreements set in motion irresistible pressures towards the downward harmonization of wages, working conditions and social standards, and so on. To greatly simplify, there has been agreement from both sides of the political spectrum that deregulated global capitalism forces states and societies to conform more and more closely to the free market model, and that success in this new context will go to those states and societies that most closely embrace the model. Proof for this proposition often cites the supposedly manifest success of the U.S. "new economy" in the 1990s, and urges countries to adopt the major features of the U.S. model.
However, Centrist, Christian Democratic and Social Democratic parties in many continental European countries have remained in or close to power in shifting coalitions and they have steered clear of directly attacking the role of collective bargaining or fundamentally undermining social security and the redistributive role of the welfare state. As noted above, national and sectoral wage bargaining arrangements covering the majority of workers remain in place, and tripartite "social bargaining" remains important in the determination of social and income security policy in some countries, and has been revived in others. The shift has not just been towards free markets, but also towards the restoration of full employment through social co-operation and active labour market policies. As a result, there remain profound socio-economic differences between advanced industrialized countries. Even in the most liberal countries, there were signs in the 1990s of a search for a new balance between growth and equity.
There are, to be sure, important barriers in the pursuit of full-employment policies in the global economy, at least until such time as there is much greater international co-ordination of macro-economic policy and exchange rates among the major economic blocs, and much more closely regulated and controlled international financial capital flows.30
Regarding the constraints of international competitiveness, it is indeed true that increased market integration and increased international flows of real investment strengthen the bargaining power of mobile businesses and make income redistribution at the national level more difficult. But some important caveats are in order to help explain why there is still a lot of room for choice at the national level.
Most important, the global economy is still dominated by the advanced industrialized countries, and most trade and investment flows still take place between and within the major blocs. The overall level of North-South trade is low relative to total global trade and relative to the GDP of the industrialized countries, and North-South trade in goods is more or less balanced – albeit with much higher labour content in goods shipped from the South than in the capital equipment shipped from the North to the South.31
Most studies have found that increased North-South trade has had some negative impacts on the wages of less skilled workers, particularly in labour-intensive manufacturing, and increased trade and international competition is associated with job loss from accelerated technological change. However, most studies find that only 10-20% of the increase in wage inequality in the U.S. over the past 20 years or so can be accounted for by increased trade, and that the impact of domestic policy-driven forces has been far greater.32
The competitive downward pressures on wages and social standards from globalization can be exaggerated. Canadian workers, for example, face much more direct and intense pressures to harmonize to U.S. levels than to very low Mexican levels. In the case of Europe, the relatively high level of labour and social standards in Germany and France has greatly limited competition-driven pressures on unions and social redistribution in countries like Sweden, Denmark and the Netherlands. Moreover, in sectors which are heavily exposed to international competition, wage costs and taxes are certainly a factor, but high productivity can offset high wages, benefits and social security charges.
If that were not the case, Germany, with the highest industrial wages in the world, would be an economic basket case, rather than a very successful economy which runs a large trade surplus. And competition today is not so much about low costs (although costs are obviously important) as it is about producing innovative and high-quality goods and services that command a price premium and thus sustain high wages and social standards.
This requires innovation and highly skilled workers – the key ingredients of a knowledge-based economy that critically depends upon the accumulation of human capital.
Furthermore, it has to be taken into account that only a minority of workers are employed in sectors directly exposed to high levels of international competition, let alone competition based on low wages/low social standards. Most service industries are much less directly exposed in most instances, and not exposed at all in others.
In principle, downward competitive pressures on wages and social conditions which do arise from intensified international competition and the increased bargaining power of capital can be countered by concerted action at the regional and international levels. The "social dimension" of the European Union can be exaggerated, but some common standards have been set out with respect to conditions of employment and working conditions. Social bargaining on social and labour market policy takes place among businesses, unions and governments at the EU-wide level, and European integration is – in the minds of many political leaders, trade-unionists and others – very much about the renewal and preservation of a more egalitarian European model of society.
Further, at the EU and indeed at the OECD, initiatives are underway to stop competitive pressures from leading to an erosion of tax bases.33 Ireland was recently compelled by the EU to modify its particularly generous tax incentives to inward foreign direct investment, and common EU tax standards being seriously considered.
Talk of the end of progressive tax/transfer systems due to greater integration is, in any case, greatly overdone in that the income redistribution brought about through taxes and transfers depends much more on the spending side than on the revenue side. (Even in the so-called Golden Age, tax systems in the Scandinavian countries were not notably more progressive than they were in the liberal countries. High levels of post-tax income equality were primarily the result of full employment, low wage inequality, and a large transfer system rather than steeply progressive income taxation.)
To summarize, the argument that the "new global economy" gives countries little or no room to pursue equity goals is exaggerated, and there are important counter-forces at play.
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