Monday, April 24, 2017
Photo of Nouriel Roubini

The backlash against globalization is real and growing. But it can be contained and managed through policies that compensate workers for its collateral damage and costs.

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Globalization’s Political Fault Lines

NEW YORK – The United Kingdom’s narrow vote to leave the European Union had specific British causes. And yet it is also the proverbial canary in the coalmine, signaling a broad populist/nationalist backlash – at least in advanced economies – against globalization, free trade, offshoring, labor migration, market-oriented policies, supranational authorities, and even technological change.

All of these trends reduce wages and employment for low-skill workers in labor-scarce and capital-rich advanced economies, and raise them in labor-abundant emerging economies. Consumers in advanced economies benefit from the reduction in prices of traded goods; but low and even some medium-skill workers lose income as their equilibrium wages fall and their jobs are threatened.

In the “Brexit” vote, the fault lines were clear: rich versus poor, gainers versus losers from trade/globalization, skilled versus unskilled, educated versus less educated, young versus old, urban versus rural, and diverse versus more homogenous communities. The same fault lines are appearing in other advanced economies, including the United States and continental Europe.

With their more flexible economies and labor markets, the US and the UK have recovered more strongly than continental Europe in terms of GDP and employment since the 2008 global financial crisis. Job creation has been robust, with the unemployment rate falling below 5%, even if real wages are not growing much.

Yet in the US, Donald Trump has become the hero of angry workers threatened by trade, migration, and technological change. In the UK, the Brexit vote was heavily influenced by fear that immigrants from low-wage EU countries (the proverbial “Polish plumber”) were taking citizens’ jobs and public services.

In continental Europe and the eurozone, however, economic conditions are much worse. The average unemployment rate hovers above 10% (and much higher in the eurozone periphery – more than 20% in Greece and Spain) with youth unemployment over 30%. In most of these countries, job creation is anemic, real wages are falling, and dual labor markets mean that formal-sector, unionized workers have good wages and benefits, while younger workers have precarious jobs that pay lower wages, provide no employment security, and offer low or no benefits.

Politically, the strains of globalization are twofold. First, establishment parties of the right and the left, which for more than a generation have supported free trade and globalization, are being challenged by populist, nativist/nationalist anti-establishment parties. Second, establishment parties are being disrupted – if not destroyed – from within, as champions of anti-globalization emerge and challenge the mainstream orthodoxy.

Establishment parties were once controlled by globalization’s beneficiaries: capital owners; skilled, educated, and digitally savvy workers; urban and cosmopolitan elites; and unionized white- and blue-collar employees. But they also included workers – both blue- and white-collar – who were among the losers from globalization, but who nonetheless remained loyal, either because they were socially and religiously conservative, or because center-left parties were formally supporters of unions, workers’ rights, and entitlement programs.

After the 2008 financial crisis, globalization’s losers started to organize and find anti-establishment champions on both the left and the right. On the left, the losers in the UK and the US, especially young people, found champions in traditional center-left parties: Jeremy Corbyn in the UK’s Labour Party, and Bernie Sanders in America’s Democratic Party.

The deepest fault lines emerged among center-right parties. These parties – the Republicans in the US, the Tories in the UK, and center-right parties across continental Europe – confronted an internal revolt against their own leaders. The rise of Donald Trump – anti-trade, anti-migration, anti-Muslim, and nativist – is a reflection of an uncomfortable fact for the Republican establishment: the party’s median voter is closer to those who have lost from globalization. A similar revolt took place in the UK’s Conservative Party, with globalization’s losers coalescing around the party’s “Leave” campaign or shifting allegiance to the populist anti-EU UK Independence Party.

In continental Europe, where multi-party parliamentary systems are prevalent, political fragmentation and disintegration are even more severe than in the UK and the US. On the EU’s periphery, anti-establishment parties tend to be on the left: Syriza in Greece, Italy’s Five Star Movement, Spain’s Podemos, leftist parties in Portugal. In the EU core, such parties tend to be on the right: Alternative for Germany, France’s National Front, and similar far-right parties in Austria, the Netherlands, Denmark, Finland, Sweden, and elsewhere.

But, despite the growing number, organization, and mobilization of globalization’s losers, globalization itself is not necessarily doomed. For starters, it continues to yield net benefits for advanced and emerging markets alike, which is why the losers still tend to be a minority in most advanced economies, while those who benefit from globalization are a large – if at times silent – majority. In fact, even the “losers” benefit from the lower prices of goods and services brought about by globalization and technological innovation.

This also why populist and anti-establishment parties are still a political minority. Even Syriza, once in power, backpedaled and had to accept austerity, as an EU exit would have been much costlier. And Spain’s recent general election, held three days after the Brexit referendum, suggests that, despite high unemployment, austerity, and painful structural reforms, moderate, pro-European forces remain a majority.

Even in the US, Trump’s appeal is limited, owing to the demographic narrowness of his electoral base. Whether he can win the presidential election in November is highly doubtful.

This is also why pro-European center-right and center-left coalitions remain in power in most of the EU. The risk that anti-EU parties may come to power in Italy, France, and the Netherlands – among others – is rising, but still remains a distant possibility.

Finally, economic theory suggests that globalization can be made to benefit all as long as the winners compensate the losers. This can take the form of direct compensation or greater provision of free or semi-free public goods (for example, education, retraining, health care, unemployment benefits, and portable pensions).

For workers to accept more labor mobility and flexibility as creative destruction eliminates some jobs and creates others, appropriate schemes are needed to replace income lost as a result of transitional unemployment. In the continental EU, establishment parties remain in power partly because their countries maintain extensive social welfare systems.

The backlash against globalization is real and growing. But it can be contained and managed through policies that compensate workers for its collateral damage and costs. Only by enacting such policies will globalization’s losers begin to think that they may eventually join the ranks of its winners.

 

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Photo of Dani Rodrik

The time for compensation has come and gone. Even if compensation was a viable approach two decades ago, it no longer serves as a practical response to globalization’s adverse effects. To bring the losers along, we will need to consider changing the rules of globalization itself.

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Too Late to Compensate Free Trade’s Losers

CAMBRIDGE – It appears that a new consensus has taken hold these days among the world’s business and policy elites about how to address the anti-globalization backlash that populists such as Donald Trump have so ably exploited. Gone are the confident assertions that globalization benefits everyone: we must, the elites now concede, accept that globalization produces both winners and losers. But the correct response is not to halt or reverse globalization; it is to ensure that the losers are compensated.

The new consensus is stated succinctly by Nouriel Roubini: the backlash against globalization “can be contained and managed through policies that compensate workers for its collateral damage and costs,” he argues. “Only by enacting such policies will globalization’s losers begin to think that they may eventually join the ranks of its winners.”

This argument seems to make eminent sense, both economically and politically. Economists have long known that trade liberalization causes income redistribution and absolute losses for some groups, even as it enlarges a country’s overall economic pie. Therefore, trade deals unambiguously enhance national wellbeing only to the extent that winners compensate losers. Compensation also ensures support for trade openness from broader constituencies and should be good politics.

Prior to the welfare state, the tension between openness and redistribution was resolved either by large-scale emigration of workers or by re-imposing trade protection, especially in agriculture. With the rise of the welfare state, the constraint became less binding, allowing for more trade liberalization. Today the advanced countries that are the most exposed to the international economy are also those where safety nets and social insurance programs – welfare states – are the most extensive. Research in Europe has shown that losers from globalization within countries tend to favor more active social programs and labor-market interventions.

If opposition to trade has not become politically salient in Europe today, it is partly because such social protections remain strong there, despite having weakened in recent years. It is not an exaggeration to say that the welfare state and the open economy have been flip sides of the same coin during much of the twentieth century.

Compared to most European countries, the United States was a latecomer to globalization. Until recently, its large domestic market and relative geographical insulation provided considerable protection from imports, especially from low-wage countries. It also traditionally had a weak welfare state.

When the US began opening itself up to imports from Mexico, China, and other developing countries in the 1980s, one might have expected it to go the European route. Instead, under the sway of Reaganite and market-fundamentalist ideas, the US went in an opposite direction. As Larry Mishel, president of the Economic Policy Institute, puts it, “ignoring the losers was deliberate.” In 1981, the “trade adjustment assistance (TAA) program was one of the first things Reagan attacked, cutting its weekly compensation payments.”

The damage continued under subsequent, Democratic administrations. In Mishel’s words, “if free-traders had actually cared about the working class, they could have supported a full range of policies to support robust wage growth: full employment, collective bargaining, high labor standards, a robust minimum wage, and so on.” And all of this could have been done “before administering ‘shocks’ by expanding trade with low-wage countries.”

Could the US now reverse course, and follow the newly emergent conventional wisdom? Back in 2007, political scientist Ken Scheve and economist Matt Slaughter called for “a New Deal for globalization” in the US, one that would link “engagement with the world economy to a substantial redistribution of income.” In the US, they argued, this would mean adopting a much more progressive federal tax system.

Slaughter had served in a Republican administration, under President George W. Bush. It is an indication of how polarized the US political climate has become that it is impossible to imagine similar proposals coming out of Republican circles these days. The effort by Trump and his Congressional allies to emasculate former President Barack Obama’s signature health-insurance program reflected Republicans’ commitment to scaling back, not expanding, social protections.

Today’s consensus concerning the need to compensate globalization’s losers presumes that the winners are motivated by enlightened self-interest – that they believe buy-in from the losers is essential to maintain economic openness. Trump’s presidency has revealed an alternative perspective: globalization, at least as currently construed, tilts the balance of political power toward those with the skills and assets to benefit from openness, undermining whatever organized influence the losers might have had in the first place. Inchoate discontent about globalization, Trump has shown, can easily be channeled to serve an altogether different agenda, more in line with elites’ interests.

The politics of compensation is always subject to a problem that economists call “time inconsistency.” Before a new policy – say, a trade agreement – is adopted, beneficiaries have an incentive to promise compensation. Once the policy is in place, they have little interest in following through, either because reversal is costly all around or because the underlying balance of power shifts toward them.

The time for compensation has come and gone. Even if compensation was a viable approach two decades ago, it no longer serves as a practical response to globalization’s adverse effects. To bring the losers along, we will need to consider changing the rules of globalization itself.

 

Bail Out the Losers?

Read Comments (3)
  1. Comment Commented

    I think the key element in Dani Rodrik’s argument is that a lot could have been done to prevent the downsides of globalisation in the US. I agree with him as well, that the hardest hit by globalisation in Western Europe at least have access to a more generous safety net.
    Nevertheless, I disagree with him when he says that anti trade voices are not significant in Europe. The TTIP had very low popular support in France and Germany and the growth of populist movements - leaning on the right or left as Nouriel Roubini clearly exposes - all over the continent is part of a clear anti-globalisation wave.
    Finally, I disagree when he states that “the time for compensation has come and gone”. Even if it should have been done earlier, I am with Nouriel Roubini in that “it can be contained and managed through policies that compensate workers for its collateral damage and costs”.
    To bring losers along, it is not necessary to change the rules of globalisation, I honestly don’t know how this could be done. In my opinion, what is necessary is to draw example from the best functioning social states (Germany, Scandinavia, The Netherlands) and adapt the same policies to each country’s reality.
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  2. Comment Commented

    I thought both contributors made very good points, but Dani Rodrik would have won the argument for me if he had proposed how to improve globalisation. So far any action seems to have tended to focus on the serious step of running campaigns opposing big takeovers considered harmful, as happened with Astra Zeneca, the LSE and the pipeline to the Gulf. I was hoping to see how we could modernise globalisation, going along the caring free trade path without damaging economies. There's the Taylor Review of Modern Employment presently in progress and the Universal Basic Income proposal is being trialed in various countries. Do we have to bring in a type of social impact report with big takeovers or new forms of employment, as you do with the environmental impact of planning applications? It was very interesting to read Nouriel Roubini and Dani Rodrik and I think it was a draw and both arguments have validity. Read more

  3. Comment Commented

    I usually enjoy Dani Rodrik's writing, but this isn't much of a debate. "Compensation won't work, we need to change the rules" is devoid of any substance. What changes? What rules?

    His argument that compensation is not possible also seems rather light weight. He says that the beneficiaries have no incentive. Yet most of what Roubini proposes as compensation (i.e. public goods) are standard fare in many democratic countries, because the bulk of voters do believe they have either principles or incentives that support them. If these goods can be delivered decades before a response to the problems of globalisation was necessary, why are they suddenly impossible after politicians the world over have been given a very substantial incentive to provide them?

    I could be persuaded there is some substance to this point of view, but it is not in the article itself. Read more