IAN McAULEY. Brexit, Trump and the Lucky Country 3 – Globalization takes the rap, unfairly

Jan 9, 2017

Globalization has been only one of the developments that has led to widening inequality and social exclusion. Countries that have globalized have also introduced a raft of neoliberal domestic policies, against which people are reacting.

It’s easy to blame “globalization” for a host of ills. The term itself is ambiguous, except insofar as it implies some party remote from our shores. Steel mills in China, bankers in Switzerland, multinational firms without fixed abode.

As such the term can provide useful cover for unpopular policies that are entirely home-grown.

The term generally refers to economic openness – to trade, investment, immigration and ideas. It’s meaningless therefore to refer to “globalization” as if it is a single property, but there have been times when prevailing norms of international behaviour could be described as more or less open.

We could go back to histories of the merchants of the Hanseatic League, or even further to aboriginal people trading in grinding stones and pituri, but a starting point for current consideration is 1944, when representatives of the soon-to-be victorious allied powers came together in Bretton Woods, New Hampshire, to hammer out a postwar economic order.

The background to the conference was the failed peace of 1918, and the isolationism and protectionism that had seen countries, each trying to pursue their self-interest, driving one another into a worsening depression and contributing to the horrors of another war. As Joseph Nye describes it:

With their countries drawn into the conflagration despite their efforts to avoid it, Western officials spent the first half of the 1940s trying to defeat the Axis powers while working to construct a different and better world for afterward. Rather than continue to see economic and security issues as solely national concerns, they now sought to cooperate with one another, devising a rules-based system that in theory would allow like-minded nations to enjoy peace and prosperity in common. (“Will the liberal order survive” Foreign Affairs, January/February 2017)

Australia was fully engaged in Bretton Woods. Our delegation included some of our most influential postwar economists – Leslie Melville, Arthur Tange and Frederick Wheeler.

From the Bretton Woods Conference emerged a number of cooperative institutions – the IMF, the General Agreement on Tariffs and Trade (later to become the WTO), and the World Bank. The spirit of such cooperation was also behind the Marshall Plan for the reconstruction of Europe, and the European Coal and Steel Community, later to morph into the European Common Market and eventually into the European Union.

The important point is that the post-1945 economic order, that saw such leaps in prosperity in all “developed” countries including Australia, didn’t just happen. It rested on a spirit of international cooperation supported by rules by which countries were expected to abide, and on domestic policies designed to ensure what we would now call “inclusive growth”.

Notably, in order to avoid countries engaging in the mutual destruction of competitive devaluations, an outcome of Bretton Woods was a de-facto regime of fixed exchange rates. Fixed exchange rates work only so long as countries pursue the same pace of economic development, and that system started to fall apart in 1971, but the general cooperative arrangements remained intact, and the general path continued to be towards global economic openness.

Also by the 1970s “developing” countries were taking advantage of a liberalized trading environment to become involved in export-oriented manufacturing, initially in labour-intensive industries, most notably clothing and simple metal fabrication. These industries were to be the first step in lifting many countries out of poverty. The “elephant curve” was starting to take shape.

Although Australia was comparatively slow to reduce tariffs, we were on a path of trade liberalization, with imports putting competitive pressure on our manufactures from the early 1970s onwards.

From 1970 to the end of the century effective rates of tariff assistance to manufacturing fell from about 35 percent to close to zero, manufacturing’s share of employment fell from around 25 percent to 15 percent (it’s now around 8 percent), and imports in relation to GDP rose from 12 to 21 percent. From 1972, for the first time in postwar history, the unemployment rate rose to above 2 percent, never to fall to such low levels again.

The easy inference is that globalization was to blame for the destruction of our manufacturing base, and if only we could reverse it we would restore those industries.

Such reasoning, of course, is subject to the post hoc fallacy, and it overlooks the impact of technological change – including the humble technology of the shipping container – and of automation.

Even in the unlikely event that our government were to re-erect a huge tariff wall, not much manufacturing employment would return. It’s only a matter of time before some of the last labour-intensive manufacturing processes, such as sewing clothing outerwear, is automated. And many goods traded around the world – software, designs, recorded music, code for 3D printing – don’t pass through any physical customs barrier. Automation is now on the verge of displacing many service industry jobs as well.

There were two reasons why in the 1980s Australian governments were able to steer through a successful program of reducing tariffs and associated industry assistance.

One was that the highest tariffs had applied to items of common consumption – clothing, footwear, domestic appliances and cars. Improved affordability of these items was a tangible benefit to most households (although some price reductions were undoubtedly due to stronger competition regulation, abolition of the old wholesale sales tax, and technological change).

The other was the Hawke-Keating Government’s management of the transition. It was a patient process, involving widespread consultation with all affected parties, often in roundtable sessions. Roundtable consultations engender trust between parties because everyone has to reveal their interests, and they help transform the development of policy from a win/lose bargaining model to a problem-solving negotiation. When governments rely on confidential deals with lobbyists they tend to be overwhelmed with reasons why reforms should not be pursued.

Also, to ease the transition the government took care to support the “social wage”, particularly through strengthening universal tax-funded health insurance.

If we come forward to 2017 it’s much harder to promote the benefits of open trade. It was easy in the 1980s for people to see the benefits of reduced tariffs on children’s shoes, but it’s much harder for people to understand the economy-wide costs of protecting local submarine production or requiring use of Australian materials in government projects, and it’s even harder for people to understand what are known as the resource misallocation effects and the general equilibrium effects of import restrictions.

This is content I have taught to postgraduate university students, and they don’t find it easy. In an age when there is mistrust of “experts”, it’s hardly surprising that people are attracted to the simple prospect that tariffs protect jobs – it makes sense, doesn’t it?

Also, in contrast to the Hawke-Keating period, strengthening the social wage isn’t a priority of our present government. Even the Rudd-Gillard Labor Government failed to support Medicare, and did little to halt the rise in housing prices. It did boost education funding, but failed to embed the Gonski reforms. And the Hawke-Keating mechanisms of multi-party consultation are long gone.

Another aspect of globalization stirring interest at present is immigration, particularly temporary immigration on 457 visas. Whether they being are used as mechanisms to cut wages and to exclude local workers is an open question, but there are certainly concerns about their use. Australia’s successful multiculturalism has been based on permanent settlement and integration and has been carefully managed. It’s not clear whether policies on temporary immigration have been fully considered.

Then there’s foreign investment in real estate – agricultural land and urban apartments.

Foreign ownership of agricultural land, particularly physically large holdings in the outback, has raised concerns. This is not a new development – as long as there has been European settlement in Australia there has been foreign ownership of land, and it now stands at about 14 percent of Australia’s total agricultural land – far less than foreign ownership of other important sectors such as manufacturing and mining – and much of it is leasehold.

The issue is emotive because land ownership is more tangible than foreign equity in corporations. There would probably be less concern if our governments took more control of land use generally, protecting the public interest in matters including tree clearing, water conservation, weed and feral animal control, soil degradation, and recreational and scientific access to land.

Foreign ownership of urban apartments is perceived to be pushing up housing prices for prospective Australian homeowners – a perception that’s probably right. But if the Commonwealth instituted a few simple taxation reforms to improve housing affordability, foreign investment would probably not be an issue.

Perhaps the greatest threat facing the idea of economic openness is that “globalization” has been used as a cover for policies that are quite at variance with the liberal principles of the postwar order.

Most prominent are so called “free trade deals”, such as the now-stalled Trans-Pacific Partnership. These deals are negotiated in great secrecy, which naturally leads to suspicion. When they include clauses that are seen to place the interests of multinational firms above those of Australian citizens they are even more unpalatable. Investor State Dispute Resolution, shielding foreign corporations from domestic legislation, is particularly odious. So too are provisions that may require countries to reduce their environmental and safety standards, in order to harmonize them with the parties with the lowest standards.

These deals are a long way in spirit and practice from the GATT and WTO systems, which were specifically designed to provide smaller countries some countervailing power against larger states.

Globalization and neoliberalism – an unnecessary connection

Somehow, it seems, “globalization” has become a term to cover a whole gamut of policies, sometimes called the “Washington consensus”, covering privatization, fiscal austerity, contracting out government services, deregulation, and other domestic policies. The Washington consensus itself has roots in a set of beliefs that emerged from the “Austrian School“ of economics (Friedrich Hayek as the most prominent), that went on to become influential in some of the world’s leading academies, including the University of Chicago and our own ANU, from where so many public servants are recruited.

Although it has its variants, its philosophical base is in the economics of individual (rather than collective) interests, and a belief that economic liberalism, social liberalism and even democracy are inextricably linked – you can’t have one without having the two others.

If governments can say that policies such as privatization and deregulation are all part of the package, it gives them a “there-is-no-alternative” cover, exempting them from the difficult tasks of justifying or even explaining these policies.

And it’s convenient to blame foreign influences or foreign institutions for unpalatable policies. In doing so, however, governments inadvertently reinforce the image of some malign, undemocratic and unaccountable foreign source power remote from our land, fuelling domestic paranoia.

Privatization, for example, is unpopular for many reasons. Australia’s postwar growth was built on a successful mixed economy model, and governments have never explained why they have been so intent on demolishing that model. Some government business enterprises, of course, became inefficient and some were undercapitalized, but rather than pursuing reform of these enterprises, governments went for privatization.

One doesn’t need an honours degree in economics or to have studied theories of the cost of capital and deadweight loss to know that there is something wrong with using high-cost private finance to fund community infrastructure, or with putting a toll road in the middle of an otherwise “free” road system.

Privatization in most cases has seen public bureaucracies replaced with even more burdensome and unaccountable private bureaucracies. Privatization also involves a sense of loss, and quite often it’s a foreign firm that takes over the privatized asset.

When community assets pass to foreign hands blaming the foreigners is a misdirection of anger. Australian firms owning assets such as toll roads and airports are just as adept at abusing their monopoly status – price gouging, indifference to customers, false and misleading conduct – as multinationals. Unfortunately governments, state and federal, have tried to deflect anger at privatization by focussing on foreign ownership issues rather than on privatization itself.

So it’s not surprising that when in mid-2016 an Essential poll put the question “Globalisation is the increase of trade, communication, travel and other things among countries around the world. In general, do you think Australia has gained more or lost more because of globalization?”, the answer came in a form that cuts across traditional left-right stereotypes.

The most enthusiastic champions of globalization were those who voted Green (strongly positive), followed by Coalition, Labor and “Other” (strongly negative) in that order. It’s an order that seems to reflect people’s lived experiences, from young and well-qualified urban “Green” voters, many of whom consider themselves to be citizens of the world, through to rural voters for non-mainstream parties – voters who feel most knocked around by structural change.


Therefore it’s reasonable to ask the broad question, “are people really rejecting globalization or are they rejecting its extension into domestic policies that favour corporations over people, that hand the community’s assets over to private companies, that unnecessarily subject people to insecurity, and that widen income and wealth inequality?” In other words, the excesses of neoliberalism.

Or, in a more positive sense, it’s hard to imagine that people do not want international institutions and rules protecting fair trade, supporting financial stability, protecting consumers in cross-border transactions, ensuring freedom of air and sea navigation, protecting global public goods such as fisheries, and helping combat destructive climate change – to name a few practical outcomes of globalization. (There is even the suggestion that some British voters voted for Brexit because they saw the EC as too insular in comparison with the old British Empire.)

Contrary to way it’s been seen by both its proponents and opponents in recent years, Globalization is not and should not be a take-it-or-leave-it package. Harvard’s Dani Rodrik points out that idea of managed globalization that underpinned the Bretton Woods arrangements has tended to give way to the idea of “hyperglobalization”, involving removing restrictions on financial flows and yielding countries’ sovereignty on domestic policies to the demands of global capital. He reminds us that the countries that have done so well in lifting themselves out of poverty, including South Korea and China, “engaged globally in a selective, strategic manner”.

Had we in Australia engaged more sensibly with foreign investors in the 1950s and 1960s it is possible that we could now have a competitive auto industry, with one Australian-owned firms achieving scale economies for a world market.

“Globalization”, the constrained and carefully-managed liberal order that emerged from Bretton Woods, now suffers from guilt by association. That is, association with the extremes of domestic neoliberalism and of unrestrained international finance. When “globalization” is presented as a take-it-or-leave-it bundle there is a risk that people will reject it, thereby rejecting those aspects of globalization that bring benefits to all.

Globalization is too glib an explanation for people’s discontent. But so too is class division, and it may help our understanding of the issues if we re-frame them in terms other than in traditional “liberal/reactionary”, “progressive/conservative” and “left/right” terms.

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