Globalisation - has the tide of opinion turned?

Reading recent debates about economic inequality in the United States, one senses the tide of opinion amongst both academic economists and the 'commentariat' has shifted. Concern is mounting, as are calls for action - even from traditionally orthodox sources. A similar trends now seems to be happening with the globalisation debate - and the two are not unrelated. Let's look at a few recent examples.

First, academic economists are becoming more concerned - and I don't just mean Paul Krugman or Joe Stiglitz. Former Council of Economic Advisers Matthew Slaughter and co-author Kenneth F. Scheve call for A New Deal for Globalization in the latest issue of Foreign Affairs magazine. Here's the abstract:

Globalization has brought huge overall benefits, but earnings for most U.S. workers -- even those with college degrees -- have been falling recently; inequality is greater now than at any other time in the last 70 years. Whatever the cause, the result has been a surge in protectionism. To save globalization, policymakers must spread its gains more widely. The best way to do that is by redistributing income.

The authors make explicit the link to living standards:

U.S. policy is becoming more protectionist because the American public is becoming more protectionist, and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor.

Second, respected global newspapers which in the past have stoutly defended the benefits of free trade and globalisation are now acknowledging the need to address the downsides as well. A recent Wall Street Journal piece by David Wessell, The Case for Taxing Globalization's Big Winners, which cited the Slaughter and Scheve paper, concludes:

What to do? To preserve political support for the globalization dividend, spread the benefits more broadly by taxing winners more and losers less.  ...Counting on the inevitability of globalization is imprudent; politics and policy can interfere. Expecting market forces to reverse the recent trend toward ever-bigger winnings for those at the top is unwise; the forces are too strong.

Taxing winners isn't without risk; as Mr. Summers says, globalization makes it easier for them to "pick up their marbles and go somewhere else." But using the tax code to slice the apple more evenly is far more palatable than trying to hold back globalization with policies that risk shrinking the economic apple.

Likewise, the Financial Times recently editorialised that Globalisation needs more than PR to be sold to its losers:

Globalisation has many virtues. Chief among them, it has contributed to an unprecedented accumulation of human wealth over the past decades and has helped lift a record number of poor out of poverty.

Yet globalisation has also created losers, particularly among the middle and lower classes in rich countries. Governments need to do more to help the groups most hurt. ...Governments need to be more active in helping the losers in rich countries. Instead of trying to safeguard industries in vulnerable sectors, governments need to be more inclusive and protect citizens.

...Many people do not mind that Bill Gates or Warren Buffett are worth billions. Both earned their wealth under the set of rules that apply to most others in rich countries. But the worry is that the global market system works to the disadvantage of people in already low-paid, low-skilled jobs in developed economies.

So government policies should focus on enabling the individual to feel as confident as possible within the global system. This could be through funding additional training or other means to help those who have lost their jobs to re-enter the market quickly. It might also imply a more progressive tax system, partial wage insurance, and untying social benefits such as basic healthcare from jobs to avoid undue fears of unemployment.

Third, even international orthodox defenders-of-the-faith such as the OECD and World Trade Organisation are starting to voice doubts. WTO head Pascal Lamy, for example, has been muttering about the dark side of globalisation. According to Reuters, last week he said in Beijing:

The speed of globalisation is affecting our social fabric in a much harsher way than in previous stages of globalisation. If globalisation has benefited some individuals, it has also weakened the position of many others, in particular the weakest and poorest among us, whether in developed or developing countries.

Hence, one of the most important challenges of our generation is to ensure that the benefits of globalisation are more fairly and widely shared, and in particular that they reach more people in developing countries.

The OECD's Employment Outlook 2007, likewise, included a chapter called 'OECD workers in the global economy: increasingly vulnerable?'. You have to pay for the report, but the 4 page editorial, Addressing the globalisation paradox (PDF), provides a good summary. The accompanying press release stated:

Rather than seeing globalisation as a threat, OECD governments should focus on improving labour regulations and social protection systems to help people adapt to changing job markets. That is the message from the 2007 edition of the OECD’s annual Employment Outlook. It reviews the possibility that offshoring may have reduced the bargaining power of workers, especially low-skilled ones. Whether real or threatened, the prospect of offshoring may be increasing the vulnerability of jobs and wages in developed countries.

...Globalisation requires mobility to ensure that workers are not trapped in jobs with no future. The report praises the so-called “flexicurity” approach adopted in Austria and Denmark to address this. In Austria, for example, workers have individual savings accounts, instead of traditional severance pay schemes, that move with them as they move jobs. If they lose their job, they can choose to withdraw funds from the account or save the entitlements built up towards a future pension.

Job losers should be compensated through social protection systems which are employment-friendly, the report notes. This can be done by providing adequate benefits hand-in-hand with “activation” policies which increase re-employment opportunities. Experience of Nordic countries and Australia shows that such policies, if well-designed, improve the job prospects of laid-off workers, thereby easing their fears about globalisation.

Addressing the labour arbitrage debate, the chapter authors concede that globalisation could "permanently increase" job insecurity for workers by making their employers more vulnerable to external shocks. But Angel Gurría, OECD secretary-general, moved to calm fears by saying that people's fears of losing jobs to foreign countries were often overblown: "Without job losses people are fearing the job losses." He called for politicians and journalists to foster a well-informed discussion of the benefits and costs of globalisation. "The story has to be told better," Mr Gurría said.

The FT was unimpressed. In its leader (cited above), it agreed that "better public relations may go part of the way", but governments still need to do more to help the losers. As Dani Rodrik notes:

You know something is going on when the FT berates globalization's cheerleaders for their complacency.

All just straws in the wind, perhaps. But I think I can can hear a gale coming...

Comments

[Arthur Eckart]

The tide may be turning at the wrong time. Globalization has generally benefited the U.S. However, there have been winners and losers. Over the next few years, there may be fewer benefits in productivity, prices, and capital, and more benefits in wages and employment.

[Arthur Eckart]

Generally, income redistribution creates more negatives than positives. The fastest growing segments of the U.S. labor market are high-skilled workers, followed by low-skilled workers, and then average-skilled workers. Most low-skilled workers have reservation wages of roughly $10 an hour, or $20,000 a year without overtime, while high-skilled workers are often paid well over $100,000 a year. There's a surplus of low-skilled workers and a shortage of high-skilled workers. Almost everyone knows, including government, business, and Asians (who are the highest income group), that education is the key to higher income. Yet, it seems, not enough has been done to better place students with skills and jobs.

[Lafayette]

AE: Yet, it seems, not enough has been done to better place students with skills and jobs.

What can you expect in a country where a college education, to obtain the skills/talents/competence necessary for a decent job costs close to $100,000 (four years of university) - and the average student graduates with a debt of $20,000?

Here's what you can expect: Kids realizing they need this education to get onto the escalator to a middle-class standard of living join the Army seduced by the siren-song of "a college education". Unfortunately, before that happens, it is entirely possible that they come home in body bags.

That cannot happen in Europe, AE. A college education is, for the most part, tuition-free. This lowering of the entry-cost to an education means more kids go onto university. Presently, about 30% of the American work force has a college degree. The EU is around 25% and catching up.

Higher education and Health Care are treated like businesses in the US and are not considered as public services. Which is why both are significantly more expensive in the US. In fact, no two other attributes of a society could be more important to ... the "pursuit of happiness".

I suppose, therefore, you pay for you get? And, if you don't pay, expect nothing?

[Arthur Eckart]

Lafayette, right, you pay for what you get. In the U.S., most Americans get higher quality education and health care. In education, Americans also get free scholarships and grants, along with low interest loans and other benefits, e.g. work study. I suspect, the opportunity cost is the reason why many Americans don't attend or finish college. You should thank the brave Americans who've promoted democracy and defended Europe, which continues its free ride.

[Lafayette]

AE: most Americans get higher quality education and health care.

It's comforting to see that you've kept your sense of humour in the face of stark reality.

We've been down this rat-hole before. Shall we agree to disagree?

You should thank the brave Americans who've promoted democracy and defended Europe, which continues its free ride.

Yes, and the next time you are in Yorktown, look at the names of the French who died for American Independence.

Please, this high drama is about to make me melt in nostalgia.

[ErwanB]

Lafayette,
what would be your solution to the education finance problem?
do you think the government should subsidise education for lower income groups?

I think it is quite a difficult one to solve since a lot unemployment is actually due to technological progress, much more so that to outsourcing, thus retraining has to be considered for the unemployed, and social policies to that effect.

[Lafayette]

Eb: do you think the government should subsidise education for lower income groups?

In a word, yes. It is a birthright, just like Health Care, or personal security, or liberty for that matter.

By education is meant all the means necessary to give people the skills/talents/qualifications/competence necessary to find/hold a job.

Today, we dispense most of that before a person reaches the age of 25. But, we are also finding that any early education, regardless of the level is no guaranty whatsoever that a person will pursue a career that matches his/her initial education. In fact, most people will have to change career streams at least twice in their lives.

So, education should also include retraining, all along one's career lifetime. This should include training for a craft or skill - not everyone will care to go to university. But, if a woman wants to be a hairdresser, then that qualification should be open to her.

Free, gratis and for nothing. The notion that one should have to pay for a qualification or skill is bizarre beyond imagination.

Besides, any country rich enough can afford it and if they cannot under the present tax structure then the solution is obvious. Raise marginal tax rates at the high end.

Does the world really, truly need another Bill Gates? Or better education of the young? (Frankly, I think even Bill would agree with me ... )

I think it is quite a difficult one to solve since a lot unemployment is actually due to technological progress

Yes, you are right. Retraining is part and parcel of the social contract that should protect people from abject poverty (which results from long term unemployment) and retraining will help them find another job. Particularly if the retraining is focused on those sectors which have the most need. (And more so if welfare checks depend upon successful completion of retraining courses.)

For instance, in the US, qualified nurses are in great demand. Why not give nursing students a stipend during which they study for their qualification. If the US Army can promise naive soldiers a university degree for three years of combat in Iraq, then America can afford to pay people to study for selected qualifications.

And, just think of the savings in body-bags that will result ...

[ErwanB]

Lafayette,
I would mostly agree with you, except on this particular issue:

Free, gratis and for nothing. The notion that one should have to pay for a qualification or skill is bizarre beyond imagination.

I am currently studying in university in the UK as a mature student, due to a career change, and I see quite a few (younger) students who frankly should probably get a job, gain some maturity and decide what career to follow, rather than persist and fail eventually due to lack of motivation/interest.
I tend to think that the (until recently) low fee for a year's education was not "enough of a deterrent" on the student to separate the motivated from the uninterested, and that the recent rise (£3000/year) will perhaps change the opportunity cost of getting an education and add an incentive (the idea of the debt motivates one to get a 2:1 or a first instead of a mere pass).
This said i could be wrong, but i believe a totally free higher education system is perhaps not the best solution to shortage of skills. The French system for instance, though much lauded by my professors leaves me a little skeptical.

on the other hand, the Swiss system is interesting, with a fairly harsh selection process and low fees, and the generally accepted high investment in human capital by employers.

The issue of student motivation and the methods to foster it (carrot or stick) seems to me of particular importance, especially when it comes to mature worker retraining/career change, past the age of 40-45 it is considerably harder to sit down and read than at 20-25.

[Lafayette]

EB: The French system for instance, though much lauded by my professors leaves me a little skeptical.

The French system is taught by selfless, underpaid, competent people. Unfortunately, no university can afford to undertake proper research, which is performed (again by government funding) in separate research laboratories.

But, it IS laudable in that the system is open and tuition-free to all who want make an effort.

If you were sick, would you want Health Care to be a matter of "opportunity cost"? People filtered according to whether they really, truly needed it or refused if suspected of being simply cranks?

Then why Education?

The social and economic utility of education is so evident, it should be given to those who seek it - and that means, in one form or another, to most of the population. Let the drop outs fall where they may. Who cares? Some education is always better than none at all.

At least they were not forbidden the opportunity because some functionary somewhere decided they are not "suitable". Or, because the opportunity cost in the form of a student loan was beyond their means.

[Arthur Eckart]

Lafayette, I've shown why studies in health care are biased. Anyone who has the misfortune of being sick would be most fortunate to receive U.S. health care. Also, much if not most of the advancements in medicine originate in the U.S. Moreover, the U.S. has a larger proportion of top-quality schools and even average U.S. schools are high-quality. Europe has lowered total welfare for greater equality, while the U.S. has tended to maximize total welfare. Consequently, living standards are much higher in the U.S. than in Europe. It's not in the best interest of Europe to become a society of "free riders," domestically or internationally (e.g. through the U.S. military).

[Lafayette]

AE: I've shown why studies in health care are biased.

bollocks, AE. Certainly, you can do better than that. The WHO classification of Health Care (2000) systems was definitive.

You don't like the results, so now you question the data/analyses? Yeah, right ...

AE: Anyone who has the misfortune of being sick would be most fortunate to receive U.S. health care.

Anyone who has the great misfortune of being seriously sick can lose their total net asset valuation trying to remedy the illness. The number of instances of this happening abound.

All of which Health Care has become a major political issue in the upcoming elections for PotUS.

So, how about disputing the statistic that Health Care cost four times as much in the US as in France? And, the fact that any given moment one sixth of the American work population is without medical insurance ... waiting in an ER somewhere for medical philanthropy (that comes from those who do have insurance policies?)

It's "Out of Africa". Let this sleeping dog lie. I am tired of repeating the same facts and getting the same pitiful responses.

You are convincing NO ONE.

[Arthur Eckart]

Lafayette, I revealed to you that 60% of the WHO study criteria were based on equality. Unfortunately, there have been few studies on health care, which tend to be unscientific, place more weight on equality, or exclude areas where the U.S. leads, i.e. normative (or political hype) rather than positive (or unbiased). However, it seems, all OECD countries spend little on preventative care, e.g. 3%, while the U.S. leads in many treatments, e.g. curing heart disease and most cancers, which are expensive. 85% of the U.S. population is covered by health insurance, while the other 15% qualify for (inferior) government health care. Americans rejected universal health care in 1994. However, there can be improvements in U.S. health care. Below is a link to an economic study.

http://www.oecd.org/LongAbstract/0,2546,en_2649_33733_21547787_1_1_1_37443,00.html

[ErwanB]

The French system is taught by selfless, underpaid, competent people.

:rolleyes:
I have never set foot in a French Faculté, but if the public primary, secondary and high school system is anything to judge by, yours is one very bold statement.
the recent admission that 20% of 12 years old cannot either read or write french properly, and that 13y/olds are at the same level as 11 y/olds of 20 years ago leads me to think you're possibly, at least partly wrong.
The issue of the methods to teach reading for instance (Methode Globale/Methode Syllabique) shows the determination and arrogance of not so Selfless or Competent people.
But admittedly, this can also be due to a variety of reasons, including the fact that a state administrated educational system may foster self interest amongst the staff.

If you were sick, would you want Health Care to be a matter of "opportunity cost"? People filtered according to whether they really, truly needed it or refused if suspected of being simply cranks?

Take the example of the British NHS, completely free, on the receiving end of a massive increase in investment these last few years (+50% under New Labour), yet consistently failing to achieve its purpose.

The social and economic utility of education is so evident, it should be given to those who seek it - and that means, in one form or another, to most of the population. Let the drop outs fall where they may. Who cares? Some education is always better than none at all.

ok, but there are still costs to this, and externalities that have to be considered.
making Higher education completely free also leads to the massification of the system. an inflation of diplomas, where one needs to study a minimum of 3 years to get a decent job is one such externalities.
There's also the issue of the level of difficulty of getting the diploma, because the pass rate determines the quality of the school in the public eye, the difficulty tends to drop. the best example in France being the Baccalaureat which has gone easier and easier in the past 20 years. same thing in the UK with the A-levels.
eventually, one has to stay in school until 22 to do what a 20 year old with 2 years of experience could do 30 years ago. Not an improvement.

Overall, I'm not denying the benefit of a university educated society, this said there are still various issues in the implementation of one such system. I guess analogies should be made between the educational and Health system, with on the one hand in France one of the best (if not the best) systems with a almost completely free market of doctors and clinics (until fairly recently) and a state funded social security to reimburse their clients, and in comparison the pyramidal, state organised British NHS, with its various inefficiencies, and on the other hand the state organised french educational system and the british system of partially private universities.

out of this i think we can see that it may be possible to preserve the efficiency of a market while allowing for the state to assist the public with the costs. this said, i believe the issue of incentives for the student should not be left out of the equation.

[Lafayette]

EB: I have never set foot in a French Faculté, but if the public primary, secondary and high school system is anything to judge by, yours is one very bold statement.

Have you ever heard of PISA? No, not the city in Italy with the leaning tower. But a global study of secondary school education undertaken by the OECD.

The study focuses on four criteria: "reading literacy", "mathematical ability", "science" and "the ability to solve problems".

In the PISA classification, which first came out in 2001, but which will be updated periodically, France comes out tied with the US, both in fifteenth position, way behind Finland in first place.

The UK, as I recall, is somewhere in the teens. A great many European countries are in the higher teens.

The salaries of most French teaches is abysmal, because they are incarcerated in the statist French public school system run by the Ministry of Education in Paris. I have a good many friends who are teachers. I have no qualms whatsoever that they have long summer vacations, because trying to teach today's youth is a Herculean task.

I would prefer to see installed the "voucher" system that promotes schools that are more competent. But, France is all wrapped up in its "republican virtues" and secondary school education is historically the factor that gave ALL children a chance at a basic education.

... this said, i believe the issue of incentives for the student should not be left out of the equation.

Education/training is NOT a market and therefore "incentives" are not an issue.

Your mistake, I suggest, is to confuse markets and public services. This is always an error, because it implies an application of the wrong metrics to measure either benefit or utility in each case.

Public services should not make profits and markets need not seek broad public utility independent of cost.

[me]

when negative pressure on wages starts affecting such a big share of the population as it is nowadays, I think the case for DEFLATION is clear. Consumers have been borrowing over their means for a while, but the day will come when companies will have to share their savings with the consumer, whom they have deprived of spending money.

[Lafayette]

me: Consumers have been borrowing over their means for a while, but the day will come when companies will have to share their savings with the consumer, whom they have deprived of spending money.

Very inward looking on myself, "me".

Companies have no charter whatsoever to maximize customer benefit, except by producing the best product at the cheapest cost.

They also have no charter to protect jobs. Both of those responsibilities lie with the state. Of course, the state, as a premise of protecting either customer benefit or jobs can interfere in markets. But, historical experience shows that such is often to the detriment of the general public. One must be careful when treating the "cash cow", which is the sole supplier of disposable income.

Manna from heaven only happened in biblical times.

The tsunami of Far East products that have invaded western markets have extended considerably the purchasing power of (even) the poor. This is goodness. It has afforded excessive riches to a comparatively select few in their countries of provenance. That is not goodness - and taxation should address that anomaly. Which also depends upon state policy.

When it doesn't, as seen in the US, what develops is "income inequality" and social disharmony amongst the classes. Meaning this, "A little bit of exaggerated wealth is OK, but predominance is simply not on". China will have to learn that lesson ... I fear, the hard way.

[Magdalena Szarafin]

For winners and losers of the globalization wave, topic: offshore outsourcing see also:

Offshoring: chance or risk? Do people have to fear about their jobs?

Magdalena Szarafin
http://www.szarafin.info

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