Openness and independence

There has been an interesting debate recently in the web pages of the Financial Times regarding what needs to be done to maintain political support for globalization. In his contributions, Larry Summers raised among many other points the issue of whether globalization implies a race to the bottom in terms of regulation, corporate income taxes, and the ability of states to maintain fiscal policies benefiting ordinary workers.

The belief that the need to maintain tax and regulatory competitiveness in a globalised world is inconsistent with progressive taxes and regulation is a commonly held one. It allows those on the left to argue against globalization, and those on the right to argue against taxes and regulation. But is the belief correct?

As an economic historian, I cannot but think back to the origins of the welfare state, which occurred at the end of the first great globalization of 1840-1914. In several recent articles, Michael Huberman has convincingly shown that if anything trade and government intervention were positively related during the late 19th and early 20th centuries. For example, a range of labour market regulations was introduced across Europe, prohibiting night work for women and children, prohibiting child labour below certain ages, and introducing factory inspections. The period also saw the widespread introduction of old age, sickness and unemployment insurance schemes. Crucially, this “labour compact” as Huberman calls it was more advanced in those countries which were more open to trade. There is no evidence of a race to the bottom here: rather, governments in Belgium and elsewhere used the introduction of such reforms to secure the support of workers for free trade.

To be sure, multinational companies loom much larger in the world economy now than they did then, and it must not be easy for governments contemplating the loss of major companies to less-heavily taxed competitors, such as Ireland. On the other hand, look at the European Union today – surely the most tightly integrated group of independent countries ever to have existed. As a share of GDP, the tax burden there in 2005 ranged from less than 30% in countries like Latvia, Lithuania and Slovakia, and less than 40% in such long-established members as Germany, the UK, Ireland and Spain, to over 50% in Denmark and Sweden. Member states have long pursued a wide range of social and economic policies, and will presumably continue to do so in the future.

Globalization has not made redundant age-old debates about the appropriate role and size of government. If that is clearly understood by voters, who like to feel that they are in control of national policymaking, then they will have one less reason to oppose economic openness.

7 Responses to "Openness and independence"

  1. Vitoria Saddi   May 15, 2008 at 5:08 pm

    Kevin,Thanks for the great piece.In your view, what are the necessary steps to preserve the support for globalization?Vitoria

  2. Anonymous   May 15, 2008 at 5:50 pm

    Professor,Thanks for an interesting piece. Could you shed more light on the inconsistencies of the belief regarding "maintain(ing) tax and regulatory competitiveness in a globalized world"? Also, a lot of empirical work has been on the importance of one form or another of regulation to aid the process of openness and globalization. In your view, how can the you balance the need for regulation without jeopardizing openness and globalization?

  3. Anonymous   May 15, 2008 at 6:09 pm

    I agree: to make globalization successful workers needs to be flexible – to move from declining sectors to new sectors – but to make globalization acceptable workers need a safety net to be able to manage the effects of this creative destruction; this safety net includes unemployment insurance, health care, retraining and reskilling. If the social safety net is missing the backlash against trade and globalization would be significant!

  4. Anonymous   May 15, 2008 at 6:11 pm

    You are effectively making a Nixon in China argument; workers need to be politically in charge of the process via appropriate government policies to accept globalization. Right?

  5. Anonymous   May 15, 2008 at 6:20 pm

    Prof, how does one deal with the increase inequality of income and wealth in a globalized world? Progressive taxation as suggested by Summers or other policies?

  6. Politix   May 16, 2008 at 2:52 am

    The only problem here is that % of taxation mentioned at the end of the article is a bit problematic. In Germany, for example, the average tax is maybe 40% but talking to a number of Germans it turns they pay 60% tax. Secondly, the countries with heaviest tax burden have the best maintained ‘welfare state’system. Those with lowest tax burden have only traces of social protection for ‘working class’. The globalization leads to dismemberment of social system; the example of Sweden where that has not happened is only one while at the same time there are tens and tens of examples that confirm what ‘flexibility’ and ‘competitiveness’ on the job market really mean in terms of economic security/safetynet of working ‘underclass’.

  7. Kevin O'Rourke   May 18, 2008 at 9:21 am

    Vitoria: one thing that would help is if politicians didn’t blame their international obligations for implementing policy reforms that make domestic sense anyway, such as keeping public finances under control (in the EU context) or reforming agricultural policies. To the poster concerned about inequality: if you care about this, then domestic policies including progressive taxation seem they way to go, not interfering with international trade.