TRADE: Welfare State Seen As Necessary To Keep Trade Open

By Jim Lobe Reprint | | Print |

Jim Lobe

WASHINGTON, Jun 3 1997 (IPS) - As the just-concluded French elections helped demonstrate, “globalisation” is posing major challenges to societies whose governments have traditionally increased the social benefits of citizens hurt by international economic competition.

And the dismantling of the powerful welfare state in the interests of enhancing economic competitiveness is not necessarily the best answer, as the ousted neo-liberal French government may now testify.

Instead, political leaders must consider new ways to ensure that globalisation — the ever-accelerating growth of cross-border trade and investment — does not disrupt social peace, according to a new book by a Harvard University professor of political economy.

“The elections in France reflect these anxieties that are linked to globalisation,” says the author, Professor Dani Rodrik.

His book, ‘Has Globalisation Gone Too Far?’, created a stir when it first appeared in April both because of its critique of his fellow mainstream economists and because the Institute on International Economics (IIE), a staunchly pro-free trade think- tank here, was the publisher.

The book has now been excerpted as the lead article in a series devoted to globalisation by ‘Foreign Policy’ magazine, whose new editor, Venezuelan economist Moises Naim, appears determined to make the influential publication a major forum on international political economy and foreign policy.

In his book, Rodrik argues that there has been “a trade-off between maintaining open borders to trade and maintaining social cohesion.” Since World War II, welfare states have expanded almost precisely according to the degree to which their economies have opened themselves to foreign imports.

As low-wage, low-skilled workers lost ground to those imports, the state increased social spending to effectively “buy social peace,” according to Rodrik.

“It is not a coincidence that social spending increased alongside international trade,” Rodrik writes. “The small, highly open European economies like Austria, the Netherlands, and Sweden have large governments in part as a result of their attempts to minimise the social impact of openness to the international economy.”

It is in the most open countries that spending on the hardest hit sectors has expanded the most, according to Rodrik. On the other hand, countries with much larger economies and relatively little exposure to imports, such as the United States and Japan, had smaller social safety nets because they had less need for them, he writes.

“The social welfare state has been the flip side of the open economy,” writes Rodrik. In effect, a “social bargain” was established between the state and those sectors in the population which were adversely affected by foreign competition.

This worked well during the 1950s and 1960s when world trade soared, but so did the ability of governments to provide social services to globalisation’s losers. That’s because most of the welfare state’s tax burden fell on capital.

But as liberalisation gathered steam in the late 1970s and into the 1980s, corporations were given more freedom to move plants to places with less regulation, lower labour costs, and lower taxes.

Social spending stopped rising, even as global trade and investment accelerated. And as tax rates and restrictions on capital began falling under the neo-liberal policies of western governments, the social bargain which had previously bought peace came under unprecedented stress.

Rodrik states the problem bluntly: “Today …the process of international economic integration is taking place against a backdrop of retreating governments and diminished social obligations,” he writes in ‘Foreign Policy’. “Yet the need for social insurance for the vast majority of the population that lacks international mobility has not diminished. If anything, this need has grown.”

“If the vital role that social insurance played in enabling the postwar expansion of trade is neglected and social safety nets are allowed to dwindle, the domestic consensus in favour of open markets will be eroded seriously, and protectionist pressures will soar,” he argues.

Fear that the French Right aimed precisely to cut away at those safety nets played a key role in Sunday’s elections, in which the Socialists, stressing the need for “an economic and social policy at the service of man,” scored a landslide victory, according to Rodrik.

Both economists and policymakers have a tendency to ignore the role social insurance has played in enabling global trade to grow over the last 40 years. “As the welfare state is being pruned, there is a real danger that this contribution will be forgotten,” Rodrik writes. “(A) victory for globalisation that comes at the price of social disintegration will be a very hollow victory indeed,” he warns.

At the same time, he says social spending could be much better targeted — by, for example, reducing expenditures on middle-class entitlements, such as Social Security, and reallocating the money to strengthen labour markets and offer worker re-training.

Rodrik also argues that advocates of free trade and globalisation should reconsider their attacks against critics who argue for “fair trade.” Notions of “fair trade” are often based on “prevailing domestic social arrangements” that have been built up over decades.

For example, if a company moves out of the United States to take advantage of such conditions as child labour or the non- enforcement of worker rights (which would clearly be illegal if it tried to do the same in the United States), the result has clear implications for “domestic norms,” according to Rodrik. Efforts to control imports made under such conditions are not necessarily = protectionist, as many mainstream economists now argue.

“Globalisation generates an inequality in bargaining power that 60 years of labour legislation in the United States has tried to prevent,” Rodrik argues. “It is in effect eroding a social understanding that has long been settled.”

For Rodrik, these kinds of understandings constitute the basis of the welfare state and, as such, are the glue which helps society hold together. “When conflict arises — when new liberalization initiatives are under discussion, for example, — it makes little sense to sacrifice social concerns completely for the sake of liberalisation,” Rodrik argues.