The political economy of globalisation
Samuel Brittan: Frankfurt 14/05/01
(See The excuse of globalisation FT 10/05/01)

The purpose of this meeting is to pay a very deserved tribute to Prof Herbert Giesch on being 80 years young. It is extremely difficult to believe his age in view of his continued activity, enterprise and keen but critical interest in the world around him. The main tributes will come over dinner. But I should at least mention how personally grateful I am for the stimulus with which he has provided me over many years.

He has an enviable fluency in English as well as German. It is said of him, as it used to be said of Dr Otmar Emminger, the late head of the Bundesbank, that he learnt his English in a British prisoner of war camp. Whether this is true or not, it is convincing. For there is absolutely no trace of American in his language; and I can only say that the tutors in the camp must have done a very good job.

But to be serious: his continued activity long after retirement age demonstrates how interested he has always been in the international and German economy as part of the wider world scene, as well as in the development of principles and theories for understanding them. It is when a person continues his activities after retirement that one sees that he has had a real vocation and has not merely pursued a career.

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The theme of globalisation has been so worked to death in recent discussion that it is difficult to find a genuinely new angle; but one way of approaching the subject is to see globalisation as an excuse.

As such it is used by almost all political actors. On the left it is used as an excuse by governments that have not tried to abolish capitalism or introduce socialism. “What can we do?” the cry is: “We will be swept away by the world capital markets if we try anything really radical.” On the right globalisation is used as a threat. Instead of arguing against excessive levels of government spending on the merits of the case people, are frightened by being told that they will be attacked by currency speculators or that their economies will become uncompetitive.

The attitude of common sense politicians in the centre is not so different. If they see the need to reform domestic pension schemes or liberalise labour markets or make any other changes, the main arguments tend to be nowadays that “we live in a harsh competitive world“ and will suffer if we do not carry out these reforms. My view is that all these threats are bogus. Reforms should be argued on their merits; and, if they are not, those who use the bogey of mysterious world economic forces will sooner or later be found out.

Of course trade and capital movements must bring about roughly equivalent cost and prices for products entering international trade. But there are many ways in which this can be done. Political scientists have invented the ungainly term “functionally equivalent institutional constellations” for this purpose. The former director of the Confederation of British Industries, Adair Turner, has written an important book Just Capital (Macmillan 2001, £20). He points out that there is nothing in globalisation which rules out the so-called European social model under which high taxes are paid to provide an extensive network of public benefits. If European workers really valued these benefits so much that they were prepared to accept lower take-home pay to finance them that would be their affair. The problem is that they do not; or the governments and unions who speak on their behalf do not; and the combined result of prevailing pay levels and payroll taxes is a level of labour costs which prices people out of work. Indeed the worst aspects are a corporatist system of labour market regulation which prevents workers from finding employers who will engage them on on different terms.

That brings us to another piece of jargon: “a low efficiency equilibrium trap”. This could mean that a country or a region such as the EU, might achieve an overall balance of payments but at sub-optimal levels of productivity, real pay and employment because of the overextension of so-called social protection.

These disadvantages need to be argued on their own terms and not because of mysterious financial forces or a superstitious fear that Europe will become “uncompetitive“. It is companies that become uncompetitive. Countries or regions can only be uncompetitive if their real exchange rates are too high, a disequilibrium which is often self correcting.

Contemporary globalisation has two main features:- the elimination or reduction or barriers to trade between countries and areas and the liberalisation of capital markets so that you can move investible funds to whichever part of the world where the returns seem highest.

It is of course arguable that the so called globalised economy is merely a return to the conditions that existed before World War One. At that time trade was roughly similar to today as a proportion of the national income and capital flows between countries were at least as large, if not larger. Even so, it is still something to celebrate. After nearly a century of wars, crises and controls the world economy has recovered some of the freedom which it enjoyed in the heyday of capitalism.

Many people will say that the development of Information Technology has added a new element, as any development in any part of the world can be viewed on computer screens within a matter of minutes. But surely the bigger breakthrough was made in the middle of the 19th century when we leapt from horsedrawn transport and sailing ships to the railways and translatlantic cable which transmitted to the New York stock exchange news of the financial crash in Vienna in 1873.

A much more important difference is that, until the the end of the 19th century, there were still vast open spaces in North America and elsewhere where workers could go if their domestic prospects were unsatisfactory. There is now no place where American unskilled workers whose wages are under pressure from the Third World or elsewhere can find a similar escape.

An American political scientist, Steven Weber has suggested that the distinguishing feature of globalisation is mobility (Globalisation and the European Political Economy, Colombia University Press 2001). From this point of view there is much less globalisation than a century ago. This is because one aspect of mobility, mobility of labour, has very much diminished. At the beginning of the 20th century millions of people were free to move to North America or wherever else they believed they could better themselves. Today the frontiers have almost closed and most international gatherings are concerned with erecting barriers to the movement of people, except for a small minority designated as refugees.

The heretical point I wish to make is that the case for further liberalisation either on the trade or on the capital side is mainly political. Barriers between Europe, North America and Japan are now extremely low - with the important exception of agriculture. As Turner has pointed out, the vast bulk of world trade now takes place between these areas. The main victims of the remaining barriers are the Third World and the former Communist countries. The real reason why conferences such as the Seattle gathering of the WTO failed was not just the riots but that success was not sufficiently important to the western countries that called the shots. M,10 A further round of WTO talks negotiations is important mainly for the emerging countries. These are now the chief victims of the barriers to trade erected by the industrialised countries and sometimes by each other. It is they who have the greatest interest in the continuation of worldwide capital flows. The hotly debated question of whether they should allow in freely imports of purely financial capital, which can be reversed at short notice, is a secondary one.

Probably the main advantage of free movement for all kinds of capital, and not just direct investment, is internal. In an economy completely open to outside influence it is much more difficult for cartels and extended family networks to carve up trade among themselves and to keep out outsiders.

One of the biggest costs of closed financial markets is the reinforcement it gives to local bureaucracy. In the late 1990s it was estimated that, on a world average, an entrepreneur needed to follow 10 bureaucratic procedures requiring 63 days of visits to government offices to start a business. But in Bolivia there were 20 procedures, the cost of following which was equivalent to over 2½ times the average per capita income.

As a recent study by the US National Bureau of Economic Research suggests, “the cost to Malaysia of the recent controls may be, not so much that foreign investors are weary of a repeat, but that domestic financial institutions were merged in a non-transparent way during the period of controls - a way that appears to favour the current political establishment.” (The Great Reversals, R.G. Ragan and L. Zingales, Working Paper 8178).

The interest of the West in all this is twofold. There is first the humanitarian one. Trade and free capital movement are much more important than gestures of sympathy or government-to-government aid in lifting them out of poverty. Secondly, increased prosperity among emerging countries should be a stabilising factor on the world political scene and help to reduce tensions which would otherwise be produced by flows of migrants looking for better opportunities.

The most important trigger for ending capital controls was the breakdown of the Bretton Woods system in the early 1970s. This brought to an end the post-war settlement under which trade was liberalised but capital movements were kept under control one the pretext of protecting exchange rates.

It has taken us nearly a century to recover the degree of openness which the world economy exhibited in 1913, and then not in migration. The most important forces behind the near century of retreats were wars and the interwar Depression. The latter provoked a widespread popular demand for insurance against market forces, which gave governments an excuse for insulating their financial markets and protecting their home producers.

There is still no agreement on why the least skilled American workers have seen a reduction in their real wages in the last few decades: whether it is due to technological change or competition from workers in developing countries. The consensus seems to be that both contribute but that technological change is more important. But the popular view attributes more to low wage competition from emerging countries and it is this which provides an opportunity for right wing radical parties in Austria, Italy and elsewhere. So far they have succeeded mainly in mobilising public opinion against immigration and have forced EU governments to insist on a seven year transitional period before the new members can enjoy the same mobility as the existing EU countries. But we cannot be sure that their efforts will not extend from migration to trade. The way in which radicals from all wings have succeeded in demonising the WTO is not a good sign.

The preservation of the degree of openness we have already achieved depends partly on cultural and ideological forces on which it would be fascinating to speculate. But it also depends on the success of world leaders in preventing both another deep depression and a runaway inflation, which is oftenfollowed by such a depression.

The record of the last few decades suggests that the business cycle will remain with us for the foreseeable future despite over-boastful talk about “stability culture“ and “ending boom and bust“. We have been relatively successful in avoiding the extremes of deep slump -- and apart from a shock in the 1970s -- of runaway inflation. I wish I could feel confident that the inflation targets, combined with fiscal rules that are now in fashion, were a sufficient recipe for avoiding such catastrophes in future. I would be more confident if these rules did not depend for their operation not merely on economic forecasts, but economic forecasts with an inbuilt tendency to over-optimism, especially at turning points.