Hard Tasks

A response to Andrew Glyn's "Egalitarianism in a Global Economy"

Dani Rodrik

Andrew Glyn is right: the constraining role of globalization is much exaggerated. The most serious obstacles to the pursuit of egalitarian policies are fundamentally political and domestic in origin. I think his advocacy of (preferably coordinated) Keynesian reflation as a solution to the employment problem in Europe is on less solid grounds, but it too has a core of truth: the contractionary monetary and fiscal policies deployed in pursuit of currency stability and the Maastricht criteria for European Monetary Union (EMU) have probably been more costly to employment in continental Europe in recent years than the "structural rigidities" one hears so much about. In fact, it is surprising that Glyn barely mentions EMU, which may yet prove to be the largest coordinated employment-destruction program in history.

However, Glyn's account pays far too little attention to the standard retorts against fiscal expansion: that much of European unemployment is rooted in structural causes rather than in inadequate aggregate demand; that many countries have only recently begun to move away from unsustainable levels of public debt accumulation; and that to the extent that these economies have slack, it is better picked up through monetary policy (cuts in interest rates) than through fiscal policy. An advocate of fiscal stimulus must have good answers against each of these counter-arguments.

Glyn also overlooks the fact that there is a great deal of variation in labor-market and distributive outcomes within Europe. Unemployment rates remain low in the Netherlands, Austria, Norway, and Switzerland, as well as in the United Kingdom. Unlike the UK and the United States, however, none of the others have achieved low unemployment by paying the price of a sharp rise in inequality. Part of the reason is that labor markets have not become deinstitutionalized to the same degree.

Note that the Netherlands, Austria, Norway, and Switzerland are all small countries that are, if anything, more exposed to the forces of the global economy than the UK is. If globalization were a significant counterweight to egalitarian strategies, we would surely expect to see the consequences in these countries. To be sure, each one has had to grapple with the consequences of openness, and in some cases--the Netherlands being the chief example--significant reforms in labor markets and welfare systems had to be undertaken. But the important point is that each of these countries has managed to retain its distinctive social institutions. For all its reforms, no one would confuse the Netherlands for the US, or even the UK.

The discussion of globalization's impact often mixes up two questions. First, has the international integration of markets greatly advanced during the last few decades? The answer to this question is surely yes. Second, has international economic integration advanced so far that national economies are now tightly integrated into a seamless web? The answer to this second question is no. Study after academic study demonstrates that national markets for goods, services, and even capital remain remarkably segmented from one another, leaving governments considerable room to maneuver. If you doubt this last statement, ponder why 90 percent of new investments by German enterprises still takes place in Germany, despite the highest unit labor costs in the world.

What has happened, however, is that many trade-offs have become steeper. As capital's international mobility increases, the tax base becomes more elastic, and the ability of governments to raise revenues to finance redistributive schemes becomes weaker. (The consequences are visible in the declining rates of corporate and capital taxation.) Countries that want to maintain generous minimum wages have to live with higher unemployment. Unilateral Keynesian efforts to stimulate domestic demand are more likely to be punished by an attack on the national currency.

All of these facts of life are being used by employers and political leaders to turn the tables further against labor, and to permanently undermine the social bargains that brought stability and prosperity to today's advanced industrial economies. Employers are doing so because it is in their interest, at least in the short run; politicians are doing so because it is convenient to plead helplessness in the face of the global economy. The end result is that globalization has become a bogeyman--a topic about which it is futile to expect to have a rational conversation.

Meanwhile, the hard task of designing new institutions and building new coalitions, ones appropriate to an environment of rapid technological change and porous economic borders, remains unfulfilled. An egalitarian agenda up to the task would start by demystifying the role of the international economy. Without exaggerating the constraints that the global economy imposes, such an agenda would face up to the reality that the task of national governments has become harder. It would scrutinize the shortcomings of existing labor-market and income-transfer policies without forsaking labor-market institutions and social insurance altogether. It would call for greater international coordination of tax policies, particularly where taxation of mobile factors are concerned. In all of this, the traditional Keynesian remedy considered by Glyn may well play a role. But I doubt that it deserves central billing.