Globalisation: a new third way

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Some politicians are reacting to the problems of the global economy by advocating protectionism. Instead, we need to spread the benefits of globalisation to more people

Globalisation has become synonymous with many of the world economy’s problems in recent years. The recession and stagnation that has followed the worldwide financial crisis have left many people in western countries angry about international banking, and the mega-rewards of the international business and financial elite has seemed a world apart from most people’s everyday struggles.

Meanwhile, the so-called emerging economies are now creating about half of global growth, with China producing the equivalent in output of a new Greece every four months.
The two big election campaigns this year – in the US and France – have seen the language of protectionism and insularity come to the fore during the primaries. US presidential hopeful Mitt Romney says he’ll slap tariffs on Chinese goods on his first day in office. President Barack Obama wants to create tax incentives for companies that make their products in the US.

In the Socialist primary election in France, Arnaud Montebourg, who came third, stood on a platform of ‘demondialisation’ (deglobalisation) while the eventual presidential candidate, Francois Hollande, has threatened to introduce tariffs for ‘unfair competition’ and has urged the return of the ‘sovereignty of the republic, in the face of globalisation’.

In the UK, the Institute for Public Policy Research has been working with Lord Mandelson, the former UK Business Secretary and EU trade commissioner, to research a different approach to the challenges thrown up by globalisation. We argue that progressive governments need to avoid the kind of populist policies that could lead to the kind of beggar-thy-neighbour protectionist spiral that took place in the 1930s. But neither do we think that the 1990s view of globalisation is an adequate response to the changes in the global economy. That approach too often saw openness and liberalisation as a good thing in itself rather than a means to the wider goals of sustainable growth, poverty alleviation or a more equitable society.

Over the course of the last century, the progressive integration of the global economy has helped drive the economic growth that has contributed to lifting millions of people out of poverty around the world.

In the developed world it has brought down the cost of consumer goods, driven productivity increases in many sectors, and created new markets for goods and services where western firms have comparative advantages.

Many people now have unprecedented opportunities to travel and work abroad, and the increasing cultural and political dialogue between individuals has helped to spread the acceptance of universal values such as democracy, liberty and human rights. The changes in the global economy should be seen as an opportunity for the continuation of these outcomes.

Nonetheless, globalisation has been associated with four main problems. First, we have known for some time that there is a strong correlation between trade and growth, but academic evidence shows that trade alone is not enough to guarantee growth. Indeed, it works only when accompanied by other pro-growth policies.

Second, while trade encourages higher productivity and helps drive technological innovation, it can also lead to job losses and put downward pressure on wages.

Third, while globalisation has helped lift millions of people out of poverty and reduced global inequality, it has also contributed to increased levels of inequality within countries.

Fourth, while access to international investment is one of the main benefits for states in a globalised economy, capital market liberalisation and short-term portfolio investment flows can also be a source of instability, in particular causing deep recessions of the kinds we are currently facing.

Being more honest about the risks caused by globalisation does not mean being fatalistic that the downsides will outweigh the upsides. In short, we must be careful to see the rise of China and other emerging economies as an opportunity for the creation of new markets for our goods and services rather than a competitive threat. Of course, it is necessary to ensure that people at the domestic level are best equipped to compete in the global economy by introducing a new approach to industrial and skills policy.

We also need to reorient our welfare system to deal with the main risks that people face, including income loss and unemployment. Our report makes these recommendations and sets out a series of international actions necessary to ensure that the world’s major powers settle on a new set of rules, rather than no rules, to ensure that globalisation’s outcomes are more benign. This last point was endorsed by senior political and business representatives of many rapidly growing countries, including Indonesia, Singapore and India, at our launch event at the World Economic Forum at Davos last month.

Attempting to insulate ourselves from the changes in the global economy will not result in the best or most progressive outcomes. Instead, we need a new, positive approach to ensure that everyone in Britain is able to benefit.

Will Straw is associate director for globalisation and climate change at the Institute for Public Policy Research. He is co-author with Alex Glennie of the IPPR report, The third wave of globalisation. This article is published in the March edition of Public Finance magazine

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