“Business as Usual”– Not a Good Model for the Future of Globalization
About 20 years ago, the American economist Dani Rodrik published a study. He named it “Has Globalization Gone Too Far?” He formulated the title as a question to sensitively express the concerns about growing disparities and social disintegration due the globalization. Nowadays, however, many observers would, without a doubt, convert that into an exclamation.
We talked to Prof. Rolf J. Langhammer from the Kiel Institute for the World Economy about the globalization, the economy and the fears and anger of the people.
GESblog: Prof. Langhammer, would you agree with Dani Rodrik’s tentative approach and say that globalization nowadays has gone too far?
Prof. Langhammer: As an economist, let me answer your question first from an economic point of view. There is sound empirical evidence that a reduction of barriers to trade of goods, services and capital will lead to efficiency gains both for companies and countries and will increase the real income of the consumers. So, from this perspective, globalization promises benefits for individuals and the society. But the flip side of the coin is that many people fear to lose their jobs without being compensated and to be left behind. This leads to protectionism and nationalism – both arch rivals of globalization.
GESblog: What is it exactly the people are afraid of?
Prof. Langhammer: People, especially those living in the industrial countries, have a sense that not only their jobs but in particular their social status are in jeopardy if economic growth leaves their reference group better off. This is more important to them as a rising real income due to higher purchasing power. They also fear a “race to the bottom” regarding social, working and environmental standards. And the democratic values of their societies seem at stake. It is also feared that other countries, just those without a democratic system, could unduly influence the domestic law making process or that foreign investors could sue countries before private courts of arbitration.
GESblog: Those are the fears in the industrial countries. What about the emerging and developing countries?
Prof. Langhammer: There, people increasingly protest against an uneven distribution of the benefits from globalization. The so-called “trickling down” process does not work as the benefits do not reach the poor people. They also lack access to the technologies and other resources they need to get empowered and to receive their fair share. In many cases, these protests are justified.
GESblog: If the people put their personal assessments of their situations above economic facts, where does that lead to?
Prof. Langhammer: The answer to this question is fairly simple. They address their fears to their national governments and parties. They demand protection and regard their governments as their only relevant decision-maker. As a result, we see trade barriers growing faster than trade-liberalizing measures. Global or bilateral liberalizing deals get stuck, demands for reciprocity end up in a freeze: no concessions without equally valuable counterconcessions . Eventually, bargaining power matters: Bilateral deals between small and large countries or rich and poor countries are more easily sealed than deals between equal partners. It’s the superior political and economic bargaining power of the large and rich countries, that makes this happen. At the same time, settling a dispute often will not reach the panels if such bargaining gaps exist. Smaller and poorer countries flinch from suing the larger and richer countries. Instead, disputes are primarily settled between countries at level playing field.
GESblog: Have we reached a turning point? Economically speaking, are we on a way to less globally organized economy?
Prof. Langhammer: It is unlikely that economic nationalism and isolationism could heat up political nationalism that could crash globalization like in 1914. Despite Brexit and the election of Donald Trump, the interdependence through direct investments is strong. The American economist Jagdish Bhagwati called that interdependence thirty years ago “quid pro quo investment”. And is has the same effect as oil on water. It cushions the “waves” of protectionism. In addition, many governments have signed multilateral agreements, many of them related to environment and climate protection, which limit their options. Increasingly, they take these agreements seriously, especially because of the pressure by a well-informed and well-interconnected civil society.
GESblog: What would need to change in the way globalization works in order to conciliate the resentments of so many people?
Prof. Langhammer: It is necessary to define a new perspective on globalization, one from the bottom up. We must understand the motivation of protests of the people in the traditional industrialized countries that lost their jobs or are likely to lose them. Often, , they don’t feel compensated enough or not at all from those who gain from globalization. We must think about the future generations, not born yet but who will be the ones affected by the decisions we make today. And we must take the view of the poorest people in the poor countries, for whom the distance to the middle class is getting longer and longer.
GESblog: What actual measures must go along with such a new approach of globalization?
Prof. Langhammer: The list is long, but let me lay out five elements that would make it to the top of my list. First, you got to re-train the people who lost their jobs, regardless of whether they lost it due to technological progress or globalization. There must be way more money invested into education and re-training than now – all refinanced by taxing consumption on a broad tax base.
Second, on an international level, we must get rid of taxation based on the import value at the borders. Instead, let us create a tax based on the environmental impact of the production. This “carbon taxation” must also be applicable to domestically produced goods so that it does not discriminate against the international trade.
The third element affects the international trade policies. They should focus on the reduction of unequal treatment of sectors and countries and on facilitating trade rather than just liberalizing trade. .
Fourth, agreements on fixing pre-entry conditions for foreign direct investors should be treated with a higher priority than agreements on trade of goods and services. This calls for new types of bilateral (or even better global treaties on investment. The old types concentrated on post-entry conditions but missed to specify ex ante under which conditions foreign investors can invest in a host country.
At last, but not least, industrialized countries should concentrate their financial funds intended for development and cooperation particularly on helping the poorest (“bottom”)billion people. This includes funds for climate goals according to the Paris agreement, too.
GESblog: Coming back to Dani Rodrik’s book and its title. Has globalization gone too far?
Prof. Langhammer: We must be careful not to attribute all pains of economic adjustment to globalization. The progress of the IT, for instance, in many respects had a fair share in creating social disparities. Since Rodrik’s study came out in 1997, we have witnessed several tipping points which gave rise to crises on a global scale: Dot-Com bubble in 2000, the global economic and financial crisis in 2008, Euro crisis 2012. Just add 9/11 2001, the war on terror, the Arab spring, ISIS, the Ukraine-Russia conflict and the refugee crisis in Europe to it, you have two decades full of uncertainties, threats and unrest. This makes people long for stability and comfort with institutions they are familiar with and which they trust. And it makes globalization an easy scapegoat.
Economic Nationalism, which primarily is promoted by the older generations, must be stopped. That is much more easily said than accomplished. The five steps I just mentioned may not guarantee that, but they could lead to a broad agreement of a globally interconnected civil society that will set the international policies in the future with more focus on equity than on efficiency.