New Hard Questions About Globalization, Center for Study of Economy and Society, November 10, 2006

New Hard Questions About Globalization

A Seminar at the 

Center for the Study of Economy and Society

led by

Jeffrey S. Lehman

November 10, 2006

Thanks to all of you for inviting me to be with you this afternoon.

I gave you, as a title, “New Hard Questions About Globalization.”  That is because, as a matter of principle, I try to keep my titles to five words or less.  Unfortunately, the loss of words entailed a certain loss of meaning.  Because the fuller and more accurate title would be, “Questions About Globalization that Are New and Hard For Me.”

My hope is that they won’t be new to you or hard for you.  And over the next hour or so I will be able to learn enough that I will no longer be quite so vexed as I find myself at this particular moment.

Let me provide you a little bit of background to how I have come to this topic.  I am not an economist, but 

I have been an internationalist for as long as I can remember.  And that is for a variety of reasons.  

One is that my father was the Assistant Commissioner of the U.S. Customs Service, so I grew up hearing about how protectionism was a bad thing and trade was a good thing.  

A second is that I spent my junior year abroad and felt transformed by the experience of living in another culture and speaking another language.  Extrapolating in the way that college students do, I figured that if it had been good for me to move around, it was probably good for everyone if things moved around.

A third is that while in graduate school I did take a course in international economics, and from that course I drew two lessons.  One is that the principle of comparative advantage is just the coolest thing.  One country is better than a second country at everything that is done.  But if they each specialize, with the weaker country doing what it is least bad at, and then they trade, they both will be better off than they would be under autarky.  And the second lesson was that within each country there would be winners and losers, so that if you wanted the result to be Pareto superior, you would have to have internal redistribution within each country from winners to losers.  I liked that because I was interested in income and wealth redistribution, and this was a justification for a particular kind of redistribution that was off the beaten track for people who talk about redistribution all day long.

Now when I began my academic career, I was pretty focused on the domestic welfare state.  My internationalist side expressed itself only in a belief that those who study welfare states should be comparativists.  We should be putting domestic welfare states side by side and analyzing their similarities and differences.  I wasn’t especially focused on the impact that these welfare states could have on one another.

The quintessential work of comparative scholarship that I was interested in was Gosta Esping-Anderson’s 1990 book, Three Worlds of Welfare Capitalism, in which he clustered welfare states into liberal, conservative, and social democratic clumps, and asked how each type functioned and what we might learn about the overall pattern.  He encouraged us all to think in terms of decommodification of labor – the capacity of a robust welfare state to liberate the worker from the choice between work and starvation, so that the worker could bargain with the employer on more equal terrain.

Then, during the early 1990’s, I started to look at things differently.  I had two different research leaves in France.  I had gone over to try to understand how the French Revenu Minimum d’Insertion, or RMI, was being implemented – whether its unabashedly cultural approach to integrating immigrant workers into the workforce was successful.  But what I came back with were two much simpler observations.

First, the French economy was very sluggish, with low growth and high unemployment; and second, French workers were very expensive, drawing high wages, long paid vacations, and carrying a high payroll tax, all the while being impossible to fire.  I assumed that those were connected as a matter of domestic economics:  it meant that if you were not capable of producing a lot of marginal value you were not employable.  But I also began to wonder if they were connected as a matter of international economics:  could it be that, under conditions of increasing competition between companies based in different countries, it was just too hard for a French-based company to produce goods at a competitive price? 

Separately, I also began to be interested in the relationship between economic protectionism and notions of cultural preservation.  The issue was bread.  There was a huge fight going on between France and the US over France’s protection of its wheat farmers.  The US was arguing that by blocking trade, France was hurting, on average, both American consumers and French consumers.  And the French reply, paraphrasing somewhat, was along the lines of, “Yes, we know.  We French could end up consuming more bread and more Coca Cola if we allowed for free trade.  But we would not be better off.  Because, in our minds, the bread would be different.  Derived from foreign grains, it would not have been nurtured by the soil that nurtured Racine and Descartes and Pascal.  It would taste different.  And so we will willingly forgo the opportunity to consume more calories of sterile bread and Coca Cola, in order to consume fewer calories of baguette and cheap red wine.

Now if every French individual had this mystical attachment to the baguette and wine, and was able to resist the seductions of Coca Cola, trade theory could accommodate all this.  The goods wouldn’t be the same goods, and even without protectionism the French would get all the Cartesian bread and wine they wanted.  

But the more interesting claim, I thought, was that French bread should be preserved as an artifact of French culture, even if individual French consumers might not act that way.  That there was an important public good at stake here, and it was perfectly appropriate for democratically elected French leaders to step in and defend it.

Last summer I returned to the world of social policy and found everybody talking, and sometimes screaming, about globalization.  And for the past 15 months I’ve been asking a lot of questions to try to understand exactly what happened.

So let me first say precisely what I mean by globalization.  What I mean is a shift in the frame of reference from the nation-state to the globe.  A shift from a world in which nations were hugely powerful actors to a world in which the power of nations was hugely undermined.  

Before, individuals and firms were, as a general matter, each contained within one nation.  Nations set the terms on which individuals and firms interacted with one another.

Now, individuals and firms had in significant respects busted out of their containers.  Roving free agents, they were claiming the authority to dictate how nations behaved, not as citizens from the inside but as claimants from the outside.

Before, the big questions were about how labor could negotiate with capital and the answers invariably involved democratic politics and the coercive power of the state.  Now, big questions to be how individuals and firms could negotiate with nations to free themselves from the coercive power of the state.  And, along the way, labor seems to have lost its capacity to negotiate with capital.

How did it happen?  The story is pretty familiar.  It involves a confluence of political change, technological change, and cultural change.

The political change had to do with free capital and free trade.  During the 25 years from 1946 to 1971, the Bretton Woods agreements gave national governments a lot of flexibility.  They set the value of their own currencies.  They managed capital flows in and out of their countries.  The International Monetary Fund helped to bridge currency reserve imbalances.

During this time period nations also had a lot of policy tools available with respect to their economies.  They could run deficits.  They could print money and accept inflation.  They could interfere with free trade – the General Agreement on Tariffs and Trade was a weak instrument, with lots of areas that it left untouched.  So tariffs were still a big part of the scene, as were export restrictions, import quotas, and subsidies.

The trend since 1971 has been to reduce dramatically the power of national governments to regulate the movement of capital, goods, and services.  The first step was the abandonment of the gold standard.  In response to overwhelming market pressures, Richard Nixon announced that the dollar would no longer be convertible to gold at the rate of $35 per ounce, and soon currencies were traded freely on markets for foreign exchange.  During the 1970’s and 1980’s, developed countries lifted virtually all controls on capital.  And during the 1990’s, as part of the so-called “Washington consensus,” key institutions of international finance pressured developing countries to remove their capital controls as well.

Meanwhile, in the world of tariffs and trade, the multinational system knows as the GATT kept expanding.  It came to include more and more countries.  And whereas early rounds were primarily a mechanism through which the members would all agree to lower tariff rates at the same time, the Kennedy and Tokyo rounds began to take on the ability of countries to use so-called non-tariff barriers such as anti-dumping rules.  The Uruguay round reached out to promote trade liberalization with regard to export subsidies, intellectual property, subsidies, services, and foreign investment.  It also created a WTO with much greater power to enforce its decisions in the area of trade liberalization.

At the same time that national governmental power was giving way to a philosophy of free movement of capital, transaction costs that used to inhibit movement were also withering away – technological improvements such as containerization and infrastructure investments such as transoceanic fiber optic cable were reducing transportation and communication costs, English emerged as a global commercial language, food could travel longer distances without spoiling, etc.

The result was an astounding increase in the pace of movement.  Movement of capital.  Of goods.  Of services.  Of workers.  Of diseases.  Of pollution.  Of ideas.  Of cultural fads.  Of terrorists.

With movement has come interdependence and independence.  We are vastly more dependent on people far away from us than ever before.  And we are vastly more independent of the authority of our own governments than ever before.  And that, to me, is globalization.

So let me now go to my questions about globalization.  As I indicated at the outset, I don’t have answers to them.  So I would be grateful if you do.  Or, alternatively, if you have suggestions for what kind of research program might generate useful answers.

By way of background, let me first assert that I think it is eminently possible to reconcile globalization with the continuation of the highly regulated, mixed economy.  The mixed economy emerged last century as a necessary response to the market failures of unbridled capitalism, specifically to what I refer to as “inefficiency-type” market failures, as distinct from “inhumanity-type” market failures.  We had the Sherman Act to address monopoly and oligopoly problems, the Securities Acts to address information asymmetries, the use of taxation and spending to produce public goods and create otherwise missing insurance markets and the like. 

It is my impression that the desire of multinational businesses for healthy markets has led to strong commercial rule-of-law movements across the developing world, as well as careful efforts to ensure that the results harmonize across national boundaries.

My first question, however, is whether globalization is compatible with the continuation of the social democratic welfare state.  Welfare states emerged last century in response to what I call inhumanity-type market failures.  

What do I mean by markets being inhumane?  Markets only compensate people for producing things that others are interested in buying.  But sometimes individuals lack the capacity to do that.  They might be old, sick, or have invested heavily in mastering a skill that has suddenly become obsolete.  The lack of market-valued capacity may be temporary and remediable, or it may be permanent.  Welfare states emerged to meet the needs of people whose needs cannot be met in the marketplace.

There are two schools of thought about the impact of globalization on welfare states.  One school, exemplified by the work of Assaf Razin and Efraim Sadka, argues that the high mobility of labor and capital that exists today will necessarily precipitate tax competition across national boundaries.  All firms will be forced by the economy to locate production in the environment where they can produce the best mix of product quality and unit cost.  If they fail to do so, new market entrants will underprice them and drive them out of business.  Countries that want to attract or retain businesses to employ their citizens will engage in various forms of tax competition. The ensuing declines in public revenues will reinforce fiscal crises within national economies that will create irresistible pressure to contract the size of the welfare state.

The countervailing position is that the sociopolitical and legal structures of free movement of capital, goods, and services are not exogenous facts.  Under traditional Ricardian theory, the more one moves to free trade, the greater the need for internal redistributive programs, or at least retraining programs, whereby domestic winners help to care for domestic losers.  If a nation refuses to do so, because of the fiscal pressures created by tax competition, it is likely to face a domestic political revolt, which could take the form of a mandate for welfare state expansion or could take the form of protectionism.

Elmar Rieger and Stephan Leibfried elaborate this argument very well in a book entitled Limits to Globalization.   They argue that the development of advanced welfare states was a necessary precondition to the movement towards a more liberal trading regime.  They contend that socially insufficient national preconditions of increased world market integration can easily translate into protectionist policies.  They don’t argue that it necessarily will; they simply observe that this is all open in the domain of contested politics.  

I think it matters enormously which direction things move in.  And I think that the possibilities of explosive conflict around this issue are quite real.  The question is how prepared nation-states are to resist the pressures imposed by the structures of global capitalism towards ever-leaner public sectors.  I would be very grateful for your insights and predictions.

The second question is whether globalization necessarily leads to highly correlated and dangerous risks to the worldwide economy.

The argument here is well presented by Barry Lynn in his book, End of the Line.  Lynn notes the recent cataclysmic changes in the modes of production:  just-in-time component delivery, hyper-rationalized supply chain management, nonredundant global delivery models, and especially a recognition that shareholder returns can be maximized and risk minimized if firms do not handle their own production but instead purchase finished goods from suppliers.  The result, he argues, is that the gears of the global economy has become too tightly coupled.  A mishap anywhere can bring the entire machine crashing down.  There’s no redundancy any more.  Businesses have successfully externalized systemic risks out into the commons.  But, just as is true of environmental concerns such as global warming, that doesn’t mean they can escape the consequences of global catastrophe.

The risk is captured in an anecdote that Lynn tells early on.  A 1999 earthquake in Taiwan forced a one-week shutdown of a couple of factories located in a single industrial park.  Unfortunately, that industrial park happened to account for almost all of the entire global production of semiconductor chips.  Those semiconductor chips are essential components in just about everything.  Electronics producers anxiously burned through their reserve inventories, which they had cut to only a few days.  Global electronics output fell by 7% for that month.  If the earthquake had been a few miles closer to the park, the result could literally have been global economic collapse.

Lynn’s book is truly scary.  But the question is whether the problem he describes is amenable to public policy solutions.  He claims it is.  He has a nice checklist of regulatory requirements -- stricter antitrust enforcement, requirements that firms double- and triple-source key components to build in redundancy, limits on the extent to which any key component can be sourced in a single geographic location outside the US, requirements that managers publish their sourcing and supply-chain arrangements, and revising the way in which multinational businesses are ascribed a putative nationality.

The problem here is that, while I can envision a politics whereby citizens intervene to obstruct free trade in order to protect their welfare states, I can’t envision a politics whereby citizens understand the dangers of correlated risks well enough to act politically.  That means there is a greater need for technocratic leadership, and it is difficult for me to envision that kind of leadership in the modern era.

So I am looking for other thoughts on how we might survive this phenomenon of an economy that squeezes out every last ounce of efficiency, at the price of making the system vastly more fragile.

The third question has to do with the impact of labor mobility on cultures.  Let’s return to the problem of the baguette.  The French believe that they are the guardians of a special cultural patrimony, and that they have a responsibility to preserve that patrimony for the benefit of future generations.  They resist the logic of globalization that requires them to categorize a baguette as “bread,” Burgundy as “wine,” and Simone de Beauvoir as “writer.”  But those aspects of cultural preservation are relatively easy.  The much more difficult challenges lie in the acceptance of Muslim immigrants within their midst.

Because part of the dominant French cultural self-understanding today is bound up with the idea of “laicite,” which roughly translates as secularism.  They consider laicite to be a great contribution to global culture.  But protecting that contribution means inhibiting the ability of French Muslims to express and preserve what they consider to be essential dimensions of their contribution to global culture.

Until globalization, the rough coextensiveness of national borders with cultural borders enabled the world to, for the most part, escape the challenges of multiculturalism.  The great exception was, of course, the United States.

One response is to say that the rest of the world should become more like the United States.  People should learn to pull back from the most dogmatic understandings of the core of their cultures, in order to make space for others.

But that feels like too easy a cop-out to me.  It seems to me that the world is stronger if it can make space for more intense, obsessive forms of cultures to flourish.  It seems to me that there ought to be room for more homogeneous societies alongside more heterogeneous societies.

The problem is, I don’t see how that can be preserved within the community of liberal democracies.  It’s hard not to recoil at the ugliness of the battle between Tony Blair and other British leaders and fundamentalist Muslims who insist on their need to be fully veiled.  Which makes me wonder whether the notions of distinctly French, German, and Swedish identities are headed for extinction.

So there are the three questions.  Can we work out a sustainable coexistence between reasonably robust welfare states and reasonably free trade?  Can we find a way to restore some measures of redundancy, some fail-safe protections, to the world of manufacturing?  And can we reconcile cultural identity and pride with labor migration and the need to develop multicultural societies?

These questions are new to me.  And they are hard for me.  I welcome your thoughts and suggestions.