JOHN MENADUE and IAN McAULEY. The future of globalisation.

Rescuing globalisation from cheer leaders and populists.

If we cannot make globalisation work for all, in the end it will work for none.  Kofi Annan

Last week John Menadue raised the issue of globalisation, welcoming comment from other people in his blog community.

As he points out, the rise of Trump in the USA, the Brexit vote in the UK and the success of protectionist parties in our federal election have all elevated globalisation as a pressing issue, and there is a risk that we slide into an era of isolationism and protectionism.  

While academic journals and publications such as The Economist and Foreign Affairs, and some journalists such as Peter Martin, Ross Gittins and Jessica Irvine,  have thoughtful and nuanced comments on globalisation, for the most part the public discourse is reduced to simplifications. In a debate with echoes of our pre-Federation free-trade versus protection arguments, globalisation is either the sine qua non for our continued prosperity or an overwhelming destructive force that has laid waste our manufacturing industries and is opening an ever-widening gulf between the rich and the poor.

If we are presented with a “take-it-or-leave-it” binary choice the almost inevitable outcome is a rejection of globalisation – a rejection of both its good and bad aspects, and a retreat to a closed, inward-looking Australia.

There are two paths we could take to such rejection. One is a set of successive moves – perhaps minor at first – to close the economy to the outside world.  A “buy Australia” preference for government purchases, “temporary” tariffs to help struggling industries, a reduction in immigration, higher visa fees, tougher hurdles for foreign investment, a reduction in foreign aid, a backing away from action on climate change, a sentimental yearning for an imagined past when we could cut ourselves off from the alien world beyond our shores.

The other path is a gung-ho approach to globalisation. A permissive attitude to tax compliance by foreign firms, ambitious trade and investment deals negotiated in secret, a yielding of national sovereignty on copyright and other intellectual property, sales of public infrastructure to foreign investors, easy visas for temporary workers, light regulation for foreign speculators in currency and stock markets, suppressed wages and conditions and weak environmental regulation for the sake of  “international competitiveness”.

That latter path may lead to higher economic growth as indicated in metrics such as GDP. But unless that growth translates into improved well-being and a fair distribution of benefits, mounting political resentment leads to a strong rejection of economic openness. Such rejection has been most starkly demonstrated by the Brexit vote in the UK and the rise of Trump in the USA, Hanson and Xenophon in Australia.

Both paths lead to the same dismal outcome – one incrementally, the other catastrophically.

As Harvard’s Dani Rodrik says “we need to rescue globalisation not just from populists, but also from its cheerleaders”. Here in Australia writers such as Ian McLean and George Megalogenis remind us that Australia has prospered when it has been open to the world, economically and culturally.

The policy alternative to these paths is not some unprincipled compromise – “a little globalisation here, a little protectionism there” – an approach that may combine the worst aspects of both globalisation and protectionism. (Australia’s postwar industry policy, involving openness to foreign investment behind a tariff wall is a case in point.) Rather, it should be based on consideration of the manifold aspects of globalisation, leading to policies that maintain national sovereignty and share the benefits of globalisation – what may be called “inclusive globalisation”.

Globalisation’s dimensions

“Globalisation” is not some fungible entity. Rather it has several dimensions. Openness to trade, foreign investment, international rules and immigration and culture are all very different.

Within trade policy it is not easy to define what constitutes “openness”.  Countries have quarantine and safety standards for example, but the boundary between reasonable provision for community safety and protectionist non-tariff barriers is blurry. Anti-dumping duties are no less reasonable than domestic laws against predatory pricing, but they can easily come to be used as trade barriers. From a laissez faire perspective tariffs imposed on goods produced in sweatshops in countries with lax labour standards can be seen as protectionist, but from another perspective they can be seen as a global responsibility to improve the lot of women and children in poor countries. Some may see bilateral or regional trade agreements as openness, while others may see them as protectionist when they take the place of multilateral agreements.

Similarly for investment. Simple phrases such as “ open for business” do not capture the complexity of openness. There are big differences between foreign investment in currency and stock market speculation (if such transactions can be called “investment”)  and investment in new enterprises involving technology transfer. Governments may have rules about thin capitalisation or transfer pricing that at first sight seem to load the rules against foreign investors, but such rules may be part of multilateral arrangements to combat tax avoidance. At a macroeconomic level a country like Australia, bearing a high level of foreign debt, may seek to privilege domestic saving over foreign investment not as a protective measure but as a means of avoiding a future debt crisis.

In a world where policy and business elites sing the praises of globalisation, there are forms of beggar-thy-neighbour policies that are not always obvious. We may have lower tariffs, and in a world of floating exchange rates the practice of competitive devaluations (which were so destructive in the 1930s) is no longer feasible. But we could well be in an era of “competitive austerity” – a prisoners’ dilemma situation where every country is seeking some other country to pursue expansive fiscal policy.

Then there is openness in the realm of immigration and culture.  High rates of immigration do not necessarily indicate openness if they are limited by ethnic or “racial” criteria, such as the old White Australia Policy. Governments can facilitate or hinder the movement of students and academics. School curriculae may or may not include compulsory foreign languages and history, politics and geography – subjects with world relevance.

A public who doesn’t understand the complexity of globalisation provides fertile ground for populist politicians offering superficially appealing but destructive solutions to the nation’s real or perceived problems, particularly in times of economic stress or when there is distrust in our mainstream political parties.

Shaping a policy response

We need to be realistic about what governments can and cannot do about globalisation. In the early decades of European settlement in Australia geographical isolation provided a level of protection (“natural protection”) far greater than could be achieved with any tariff, but in a continuing process since the telegraph arrived in 1872, communication and transport developments have removed that isolation. We cannot turn our backs on instant and cheap electronic communication, low-cost airfares or container ships.

To help public understanding we need analysis from trusted sources about the drivers of structural change in Australia – those changes that have seen painful adjustments, particularly in labour-intensive manufacturing and in certain regions. Globalisation is only one of many drivers of those changes. How much has been due to technological change as capital displaces labour?  (A high tariff wall may slow down capital-labour displacement, but doesn’t stop it.)  How much has been due to a loss of natural protection?  How much has been due to changes in consumer preferences?  How much has been due to bad public policy (inconsistencies in industry and taxation policies) and how much has been due to bad private management?

Unfortunately “globalisation” is an easy scapegoat for all our problems. It’s far easier to blame anonymous foreigners for our problems than our own policymakers.  Also, it has provided a cover for unpopular policies that really have nothing to do with the rest of the world. While there are certain fashions that catch on in the English-speaking world, there is no globalisation argument for “small government” or “privatisation”, which are purely domestic matters.  Countries with “big government” such as Denmark and Sweden can be much more open to the world than countries with “small government” such as the USA.

Also, the case for economic openness has become much harder to put to the public than it was during the time of the Hawke-Keating administration, when our currency was allowed to float and most forms of trade protection were removed or drastically reduced. Cheaper clothes and cars were the visible benefits of trade liberalisation, and those who paid the price were often recent immigrants without much political voice. It is much harder to demonstrate to the community the benefits of fully-imported submarines, because most people don’t easily engage with the economics of general equilibrium theory.  The task of bringing those most affected along with policies of economic openness has never been easy, and in recent times it has become much more difficult.

Similarly it is hard for many people to see the benefits of immigration, particularly in regions with high unemployment. The visible effects of immigration include overcrowded roads and schools and high house prices, while the benefits in sectors as diverse as fast food and health care are less obvious. If fault must be found it is more likely to lie with governments that have failed to invest in infrastructure and to plan responsible settlement policies. And there can be alliances between those who seek to restrict immigration because of pressure on our natural resources, and those who seek restriction for racial or xenophobic reasons.

All this means that while the case for economic openness is as strong as it ever has been, there is a big policy challenge in bringing the public along. If the public see globalisation simply as a means of serving the big end of town, while passing the costs on to the rest of us, one way or another we will reject it.

The political challenge for the “right” is to understand that economic growth is pointless unless the benefits of growth can be fairly distributed. Promises that growth is a pre-requisite for fairness down the track leaves the public unconvinced. Such promises have been common since the rise of Thatcher’s and Reagan’s “trickle down economics” 35 years ago, over which period inequality has continued to rise in most developed countries. The aphorism “a rising tide lifts all boats” rings hollow after time.

Inequality is not just about material standards; it’s also about social exclusion. No amount of distributive welfare can compensate for the loss suffered when people are deprived of the pride they once felt as members of a hard-working productive community. Nor do people want to be shunted into dead-end low-pay servile jobs. The political lessons from Brexit and the rise of Trump are in plain sight: those who are left behind get tired of waiting and come to believe that the established political classes are servants of an elite plutocracy.

The challenge for the “left” is to re-engage with economics, rather than to stand on the sidelines and assert that economic objectives should be sacrificed to “social” objectives. Such categorisation makes the same error as is made by those on the right, in that it sees economics as disconnected from the public purpose. Allocating resources to health, education, and infrastructure is good economic policy, and there is no rule that “small government” is good government. Those on the “left” need to recall that the post-1945 economic order that saw so many people lifted out of poverty and that saw such a high growth in living standards was shaped by progressive and liberal politicians, committed to globalisation. These people had lived through the 1914-1945 period when protectionism, nationalism and racism had contributed to the horrors of the time.

The consensus in the postwar period was that the economic role of government, besides the normal functions of providing public goods, was to protect capitalism from its own self-destructive tendencies. The presence of communism as an economic alternative certainly helped keep capitalism on its best behaviour, but since 1989 that disciplinary constraint has given way to an overconfident triumphalism.

We will be posting extracts from a recent address on ‘Globalisation, Socialism and Democracy’ by Ross Garnaut.

We also welcome contributions to this important debate. Please use email: johnmenadue@johnmenadue.com.

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3 Responses to JOHN MENADUE and IAN McAULEY. The future of globalisation.

  1. Michael Keating says:

    The reviews of the evidence in just about all the expert literature shows that technological change has had and is having a much greater impact on employment, the distribution of jobs and the distribution of incomes than the various forces unleashed by globalisation have had. This is why manufacturing output continued to increase in all the advanced economies (including Australia) for decades after manufacturing employment started to fall. If globalisation had been the main influence, then manufacturing output should have been as much impacted as manufacturing employment.
    International comparisons also show that how governments respond to technological change has a major impact on the extent to which skill-biased technological change has affected the distribution of incomes. For example, the costs of higher education in the US means that the supply of skills has lagged the increase in demand and the premium paid for skills has risen substantially in the US in response to skill biased technological change. Whereas in Australia the supply of skills has broadly been expanded in proportion with the increase in demand, and so the premium paid for higher qualifications has remained broadly stable, and the increase in inequality has been much less than in the US.

  2. Adrian Foley says:

    A most important debate. It would be good to have as an outcome from the debate generally acknowledged positive and negative criteria for each major policy area, in relation to social and economic objectives. For example, in relation to a proposed free trade agreement, what positive and negative features should the Australian people be on the lookout for, in deciding whether to support the agreement.

  3. Julian says:

    Many thanks to you both for an excellent summary of the present situation.

    I once heard someone describe the phenomenon of globalisation as being like a very long and very heavy freight train – something that can’t suddenly be slammed into reverse without likely severe consequences to the signalling sytem and to the track itself.

    And even if attempts are made to slow down this train, what of all the traffic behind it, what of the traffic waiting for it, what of people waiting for their own connections, and so on, and so on?

    Whatever choice is made about this, sooner or later Joe Average is going to ask: “What’s happening now?” and “What’s likely to happen later?”

    As you say: explanations are critical, and in the main, that is not happening but desperately needs to.

    Thank you for your efforts, and may they continue.

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