"Big Governments and Globalisation are Complementary"

International trade produces both winners and losers, but "the winners win more than the losers lose, so governments should boost public support for trade by creating ex ante mechanisms that share the pains and gains." This research provides evidence that these types of mechanisms are actually able to reduce public resistance to free trade policies [see also Comparing Flexicurity in Denmark and Japan for more on this general topic]:

Big governments and globalisation are complementary, by Anna Maria Mayda and Kevin H. O’Rourke, Vox EU: While economists have preached the virtues of free trade for over two centuries, the majority of their fellow citizens remain stubbornly protectionist. When over 60,000 people in 47 countries were asked in 1995-1997 whether they favoured free trade or stricter limits on imports, approximately 60% of them chose the latter option.[1] As China and India rise to economic prominence over the coming decades, it is predictable that such opinions will become even more prevalent in Europe and the United States than they are now. Faced with such fears, is there anything that governments can do to reassure their fellow citizens, or do they face a straightforward choice between facing down and giving into protectionist demands?

One of the main complaints against globalisation is that it heightens economic insecurity, making for a riskier, less predictable environment for individual workers. If globalisation does increase risk, then one response would seem to be for governments to provide workers with insurance, guaranteeing them appropriate safety nets in the event of unexpected dislocation. According to a famous paper by Dani Rodrik, this explains why more open economies have bigger governments; far from being substitutes for each other, governments and markets are in fact complementary, with appropriate government programmes being essential in shoring up political support for trade.[2]

Indeed, economic history provides considerable evidence in favour of this view, since it was precisely during the heyday of the first great globalisation, in the decades running up to the First World War, that the foundations of the modern welfare state were laid. Across Europe, socialist parties then supported liberal free trade policies, in return for the introduction of a range of social insurance programmes, such as old age pensions, accident insurance or unemployment insurance. These reforms tended to be most advanced in those countries which were most open to the world economy of the day. Far from globalisation leading to a race to the bottom, this was a period in which free trade and social progress went hand in hand in Europe, and recent historical research suggests that this is precisely why governments were able to maintain a consensus in favour of free trade.[3] Similarly, the post-1945 political settlement, which combined a commitment to both open markets and domestic stability, can be seen as acknowledging that while the interwar move towards autarky had been disastrous, and that openness was essential to economic recovery, such openness would be unsustainable without active government intervention to reduce and insure against economic volatility.

In a recent paper co-authored with Richard Sinnott, a political scientist, we have uncovered suggestive microeconomic evidence in support of the view that government expenditure can boost support for free trade.[4] Using survey data for 18 countries in Europe and Asia, we found that those who were more risk-averse were most opposed to trade. However, this effect was considerably weaker in countries where government expenditure accounted for a higher share of GDP.

In one econometric specification, an increase in our risk-aversion variable to its maximum value was associated with an increase in the probability of the respondent being extremely protectionist of approximately 6.5 percentage points in Sweden, which is certainly a large effect. However, the probability of the individual respondent being extremely protectionist increased by approximately 16 percentage points in Indonesia, or by more than twice as much. The crucial difference between the two countries, our results suggest, is that while in Sweden the government consumes 26.6% of GDP, the government consumption share in Indonesia is only 6.5%. It is not surprising that those who dislike risk should be less worried by free trade in Sweden, where the government does in fact provide such insurance, than in Indonesia, where workers and families are to a much greater extent left to their own devices.

Admittedly, individuals object to free trade for a variety of reasons. For example, survey evidence suggests that some oppose deeper economic links with the rest of the world on what are essentially non-economic, chauvinistic grounds. Within Europe, our results suggest a clear link between pro-European and pro-trade sentiment, which is hardly surprising given the way that European integration has advanced historically. Nonetheless, by providing complementary domestic policies, and by making it clear that individual families will not suffer unduly as economies open up to trade, rich-country governments can help maintain support for the liberal trade policies that will be essential if poorer countries are to continue to export their way to greater prosperity in the decades ahead.

Footnotes

1 World Values Survey, 1995-1997. See http://www.worldvaluessurvey.org/.

2 Rodrik, D., 1998. Why Do More Open Economies Have Bigger Governments? Journal of Political Economy 106, pp. 997-1032.

3 Huberman, M. and W. Lewchuk, 2003. European Economic Integration and the Labour Compact, 1850-1913. European Review of Economic History 7, pp. 3-41.

4 A.M. Mayda, K.H. O’Rourke and R. Sinnott, 2007. Risk, Government and Globalization: International Survey Evidence. CEPR Discussion Paper 6354 (June). Available at http://www.cepr.org/Pubs/new-dps/dplist.asp?dpno=6354

Comments

[save_the_rustbelt]

I am always amazed when economists discover something they should have learned in Poli Sci 101.

Create policies that hurt me and I will vote against you.

[Mark Thoma]

The point is that this provides evidence for the mechanism, it's not a discovery of it as you have characterized it. We have this funny thing where, even if something seems obvious to people like you, we still like to see actual evidence for it, the types of programs that matter the most, etc., and knowledge of the magnitude of the effect is useful as well. Or did you already know that too?

[dale]

The first great age of globalization was also the age of Imperialism. That seems to mitigate against using it as an example of social progress,

In general I appreciate articles that discuss our actual, specific trade regimes. Not articles that talk about globalization and "free" trade in the abstract. We are dealing with the impacts of specific trade regimes that are not so much "free" trade regimes but rather have regulated trade in specific ways that have benefited some and harmed others. We could have negotiated quite different sets of trade regimes that would have quite different consequencs.

And there is far too little discussion of the impacts these trade regimes have on our structures of democracy.

[zinc]

I reserve my right to remain skeptical concerning globalization for the next ten years.

By my score card, I have watched the US economy degenerate into a debt bloated, finance driven, bubble economy. The majority of citizens have experienced a decrease in real wages and wealth which has been complemented by a decrease in savings and increase in debt.

The national financial position has been correctly characterized as resembling a "banana republic", bloated by debt and shifting the cost and risks to the children and un-born citizens.

I honestly cannot point to one credible example of sustainable national benefit from our trade policy and the globalization movement. Of course, I don't shop at wal-mart, the real benefactor and beneficiary of globalization.

[John V]

It's a bit of a strange assessment:

Countries with bigger governments are more apt to have trade fears soothed and thus be more open to trade liberalization.

Perhaps "more wealthy and diversified governments" is a better way of putting it.

Either way, it almost seems that here that we're looking for a reason to justify big government by boasting how it's existence in a country reassures people enough to be more open to freer trade.

Couple of hazy points:

I think (and I may be wrong here) that most poor countries have a much larger governments and spending in relation to GDP.

Trade liberalization correlates pretty well with a countries ability to afford more government services...whether or not they are justified by any objective measure. IOW, countries with more liberalized trade policies tend to be wealthier BECAUSE OF IT in part.

Assistance to help displaced people doesn't need to be that big. Jobs lost to outsourcing are a very small percentage of jobs lost domestically every year. We have job training and unemployment insurance for them. Jobs lost to outsourcing shouldn't really be seen any differently or require any specialized assistance that is different from what is already there. Either way, it's not very large expenditure compared to the rest of government spending.

Just some thoughts.

[Brooks]

I think Mayda and O'Rourke make a valid and important point. It applies not just to international trade, but to capitalism / free markets in general, and most arguments against free trade are essentially arguments for restrictions on capitalism, and usually for the same essential reason: to protect and limit the harm/risk to a minority of the population as we also seek to maintain enough capitalism to improve living standards for the majority. Such restrictions have pragmatic political benefits (making a backlash against capitalism or international trade less likely), but also, obviously, a moral component. With regard to international trade, however, there is an additional moral element to consider, which is that restrictions on international trade in the U.S., for example, often involve protecting relatively well-off American workers at the expense of workers abroad who are far poorer and far more desparate (which is why they are willing to work for much less compensation and why labor-intensive goods made there are more competitive and preferred in many cases by American consumers/end-users).

[John V]

Zinc,

your post is a little over the top. the problems you mention like debt and bubbles are the result of monetary policy and heavy spending...not free trade.

Then, the idea that "the majority" of people have seen decreased wages is simply wrong. Wage stagnation or slight decreases are general occurrences all over the work force. They are concentrated in low wage jobs. Besides, people's income increases as they get older. Snap shots don't tell the whole story. the story of a 19 year old high school drop out will different from 35 year old high school drop out...never mind groups with more schooling as seen across their careers.

Census reports show that the share of U.S. households earning $35,000 to $75,000 has shrunk 1% the last decade, from 34 percent to 33 percent. But so has the share earning less than $35,000 and by 3% from 40% to 37%.

It's the share of households earning more than $75,000 that has increased from 26% to 30%.

bottomline though is that out economy is always evolving and working toward improvement and free trade is a big part of that.

Less free trade hurts, more helps.

[John V]

Brooks,

there's another component there:

protectionism not only helps a very small amount of special interest workers earning better than average salaries but, in doing so, hurts everyone else with higher prices.

If I had the protection of being the only pizza shop in town, I would be better off and my workers would to but the rest of the town would not.

Protectionism is harmful to our economy. looking to very small pockets of workers while ignoring the common good is dishonest politics.

I'm saying you're doing that. I'm just adding onto your point.

[John V]

correction, Brooks:

I'm saying NOT you're doing that. I'm just adding onto your point.

[german_reader]

Just a few remarks.

- Is an ever rising global trade really the path of the future ? In the age of global warming, peak oil and the coming scarcity of natural resources it seems reasonable to avoid unnecessary transportation ways, produce as much as possible on the local, regional level. The ecological costs of globalization might outweigh the economic gains of free trade in the future.

- "Flexicurity", the compensation of the losers of free trade by a more generous welfare state is even here in Europe mostly used as a simple placebo. There are a lot of announcements but very few real actions. One could often get the impression that the discussion of "Flexicurity" only aims at becalming the moods, not to make any concrete changes to the rules of the game. Especially as long as the winners of global trade - corporations, capital holders, some specialized groups of employees ( mainly in the financial sector )- have so much more influence on political decisions than the rest of the population. It's unrealistic that they'll voluntarily pay an adequate compensation to the losers of free trade.

@John V.

A large public sector, a high share of the government in the economy and a very detailed law system which is asserted by a powerful government are characteristics of developed nations. Developing countries on average have a small public sector, low tax revenues and often weak governments. The most developed nations in the world all have relative large government sectors. Even the United States with their irrational resistence against public solutions have a much larger public sector than - lets say - Ethopia or Bolivia.

And there are good reasons to believe that many of the problems of the US-system, which make the US sometimes look like a third world country from an European perspective ( health care, parts of the public infrastructure, social exclusion of major parts of the population, crime rates ...), are the result of an insufficient government intervention into the society/economy.

@Brooks

Why should the normal employee/worker pay the price for the improvement of the living conditions of Chinese or Vietnamese workers? Why not those who have the largest gains from globalization - corporations, large capital holders or enterprise owners? For the average citizen, the average employee in the Western World the advantages of globalization are limited ( lower prices ). And they are often abolished by the disadvantages ( job loss, wage stagnation, higher social insecurity ).

The real big winners are others, those at the top. They make their extra profits often on the back of the workers in the Western World AND on the back of workers in the developing world. Working conditions for Chinese or Indian workers could be much better if corporations such as WalMart wouldn't try to maximize their profits by holding down the wages of workers in the third world. And Western corporations ( especially from the US, but not only ) are the main opponents against unionisation and better working conditions in China and elsewhere.

A really fair solution would combine the enforcement of some basic labor standards in the developing world ( for example working hours, vacancies, right to unionize, working place security ...) for companies which intend to export to Western countries with the partial compensation of Western workers through a better social safety net and the shift of the tax burden from low and middle class labor income towards top earners, corporations and capital owners.

But I don't think that such a more balanced version of globalization has any chance under the current political conditions - neither in the US nor in Europe.

[save_the_rustbelt]

Mark:

Trip to the woodshed deserved, but a great deal of damage is done while we contemplate these issues.

If globalization is putting workers under new pressures maybe the public policy pipeline needs to respond faster.

[Brooks]

John V,

I generally agree. And while I think some degree of conditionality of free trade on environmental standards and labor practices (e.g., worker safety) is legitimate, I think that such arguments are usually a smokescreen for the bottom line reality: there are lots of people outside the U.S. who are materially much less well-off than Americans capable of comparable work, and who are therefore willing to work for much less, and opponents of free trade are usually simply placing the well-being of minority segments of Americans disproportionately and unfairly over the well-being of people abroad who have much less, and over the well-being of the majority of Americans.

[Brooks]

John V and others,

FYI, My Question for Lou Dobbs

[anne]

"Then, the idea that 'the majority' of people have seen decreased wages is simply wrong."

Fine, then, where are the precise references? As far as I remember, median American wages had decreased for 5 years as recorded in 2006. Whether there was a year 6 I do not recall, but if not the gain in meian wages have been anemic if any for these years.

I do not, however, find trade or globalization the problem, and wish for more with the sorts of protection to workers of a Sweden or France or Germany or Norway.

[John V]

Anne,

they're from the census.

I don't remember the link and it's off my "History" but Do remember the percentages.

[robertdfeinman]

A personal story. I worked at the same place for 25 years. For most of this time the core group I worked with was very stable. The company even had a 15 year club and there were at least 20-30 new inductees (out of a workforce of about 400) each year.

Somewhere about year 20 a new leadership took over (this was a non-profit) and decided that things need to be more like the for profit world. Several of my colleagues were abruptly fired and made to leave on the same day they were told. This only affected fewer than five people, but it changed everyone else's attitude. Instead of a cooperative, family type of atmosphere it became a worker vs management environment. It has never recovered.

People's assessment of risk doesn't need to be based upon their actual chances of being directly affected. Downsizing has made many people more cautious. This has probably meant less willingness for individuals to be creative on the job (why stick out), less willing to move from one job to another and less willing to take risks in their personal lives.

Economic studies may be able to indirectly infer such behavior, but it would take sociological studies to quantify it. If the models want to incorporate this type of attitude change they will need to add other measures which put a price tag on mindset.

[dale]

From an EPI article by Josh Bivens:
http://www.epi.org/content.cfm?id=2807
The potential level of redistribution caused by offshoring is vast, and so should be the policy response. The best way to fashion redistribution of the scale implied by this paper’s findings is through large-scale social insurance programs and public investments that insure a baseline level of economic security for American families: universal health care, stable pension income, disability and life insurance, and a lifetime of access to high-quality public education. Offshoring and trade are, of course, not the only rationale for such social insurance programs, but they do starkly illustrate the fundamental fact underlying the need for them: your economic lot in life is not wholly your own making, and in the new economy, it is less under your own control than ever before.

The failure of the economics profession to educate the larger public (including the policy-making and pundit-class elites) about this too-little known aspect of trade theory explains much of the chasm between elite and popular attitudes toward globalization. A serious understanding of what globalization means for the U.S. economy and its workers—and what must be done to hold the broad American working- and middle-classes whole in the face of global integration—requires this failure be corrected.

[anne]

http://www.epi.org/printer.cfm?id=2803&content_type=1&nice_name=webfeatures_snapshots_20071003

October 3, 2007

Wages Continue to Grow Slowly, Despite Job Recovery
By Liana Fox

Since 2001, median wages in nearly half of all states have failed to keep pace with inflation. From 2001 to 2006, 21 states experienced real wage decline, while only two states, Arkansas and North Dakota, experienced real annualized wage growth of at least 2.0% per year. While the national economy recovered jobs lost from the last recession, wages for middle-income workers remained stagnant. During this period, national median wages increased only 1.2%, or 0.2% per year. In the previous five years, 1995 to 2000, median wages increased 1.5% per year.

Falling labor standards are partly to blame for this slow wage recovery. Additionally, the shift from high-wage manufacturing jobs to low-wage service-sector jobs has affected median wages.

[anne]

What we have been and are experiencing from the beginning of this Administration is an increase in share of economic growth accounted for by profits at the expense of wages. I do not attribute this to trade of globalization, but to changes in fiscal structure and loss of balance in favor of corporate management against workers and even to an extent against corporate ownership.

[anne]

http://www.cbpp.org/8-31-06inc.htm

August 31, 2006

Wages and Salaries Captured Smallest Share of Income On Record: Share of Income Going to Corporate Profits at Highest Level Since 1950
By Aviva Aron-Dine and Isaac Shapiro

Commerce Department data released on August 30 show that in the first half of 2006, the share of national income that went to wages and salaries was at the lowest level on record, with data going back to 1929.[1] The share of national income captured by corporate profits, in contrast, was at its highest level since 1950.

These findings reflect weak overall growth in wages and salaries — and rapid growth in corporate profits — since the current economic recovery began in November 2001. Growth in total wage and salary income was exceptionally weak during the first stage of the recovery but has picked up in the last few years and has been strong so far in 2006.[2] Even with this recent improvement, however, wages and salaries have grown more slowly during the current recovery than in all but one other recovery since the end of World War II.

Corporate profit growth, on the other hand has been robust throughout nearly all of the current recovery. Corporate profits have grown more rapidly in the current recovery than in any other equivalent period since World War II....

[dale]

Anne, it is said that if our current trade regimes bring significant gain then they must also bring significant loss.

[Patricia Shannon]

http://www.sciencedaily.com/releases/2007/11/071107100921.htm

ScienceDaily (Nov. 12, 2007) — Pollution from marine shipping causes approximately 60,000 premature cardiopulmonary and lung cancer deaths around the world each year, according to a new report. The report benchmarks for the first time the number of annual deaths caused globally by pollution from marine vessels, with coastal regions in Asia and Europe the most affected.

[W]

The article gives two options:
1) Protectionist tariffs with smaller government
2) Free trade with larger government.
Both create inefficiencies. The question seems to be whether tariffs or increased taxes to fund a stronger safety net will be more efficient. I'm not completely convinced that protectionism is that bad. Yes, it creates inefficiencies, but so does increasing taxes to fund a safety net. Any argument why one is more efficient?

[kroniks]

What we are doing isn't "free trade". We shift production overseas so we can buy back at a lower price or to save on labor cost.