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News Release

Globalization Requires Positive Government Policy Responses

March 13, 1997

Contact:    Dani Rodrik    (617) 495-9454

Washington, DC—Globalization is generating a widespread backlash that could undermine political support for an open world economy. A new Institute book by Dani Rodrik, professor of International Political Economy at Harvard University, concludes that globalization is beneficial on the whole but that it can impose significant costs on some groups within each country. Policymakers must, therefore, respond by ensuring that international economic integration does not contribute to domestic social disintegration. Protectionism is not the answer and would in fact be counterproductive. But external liberalization must be complemented with internal compensation and social insurance for groups who suffer from globalization and who would otherwise increasingly oppose its further evolution.

Rodrik identifies three sources of tension between the global market and social stability. First, globalization makes the services of large segments of the working population more easily substitutable across national boundaries and therefore transforms the employment relationship. The postwar social bargain between workers and employers, under which the former would receive steady increases in wages and benefits and a certain degree of job security in return for labor peace, is thereby threatened. The result is a widening rift between groups who have the skills and mobility to flourish in global markets and those who do not have these advantages.

Second, globalization engenders conflicts over social norms and the institutions that embody them, both within and among countries. Trade becomes contentious when it unleashes forces that undermine the norms implicit in domestic practices. This sense of unease, argues Rodrik, is one way of interpreting the demands for "fair trade." Much of the discussion surrounding the "new" issues in trade policy—labor standards, environment, competition policy, corruption—can be cast in this light of procedural fairness.

Third, globalization has reached a stage at which it has become exceedingly difficult for governments to carry out one of their central functions: the provision of social insurance. Since World War II, governments have used their fiscal powers to insulate domestic groups from excessive market risks, particularly those having an external origin. This function served throughout the postwar period to help maintain social cohesion and domestic political support for ongoing liberalization.

Countries that are the most open to trade (such as Sweden, Denmark, and the Netherlands) have traditionally spent the most on income transfers. At present, however, receding governments and diminished social obligations are occurring in parallel with international economic integration. The question is how the tension between globalization and the pressures for socialization of risk can be eased.

Each of these points, argues Rodrik, reveals an important weakness in how advanced societies are currently handling—or are equipped to handle—the consequences of globalization. Collectively, they point to perhaps the greatest risk of all: that the cumulative consequence of these tensions will be new class divisions between those who prosper in the globalized economy and those who do not, between those who share its values and those who would rather not, and between those who can diversify away its risks and those who cannot. Rodrik warns that this deepening of social fissures harms all sectors of society, including the winners from globalization because of the threat they pose to the continuation of the process.

The appropriate lesson for national policymakers is not to retreat behind protectionist walls, Rodrik concludes. Protectionism would be of very little help and would create its own social tensions. The right lesson is to complement the external strategy of liberalization with an internal strategy of compensation and social insurance for groups most at risk. Among other things, this requires shifting the focus of welfare programs from old-age pensions to labor-market insurance.

At the global level, Rodrik concludes that the challenge is twofold. On the one hand, multilateral rules should encourage greater convergence of policies and standards on a voluntary basis. This is one way of reducing tensions that arise from differences in national practices. On the other hand, the rules should be flexible enough to allow selective disengagement from multilateral disciplines. The purpose of such expanded "escape clause" mechanisms would be to allow countries greater breathing room, under well-specified contingencies and subject to multilaterally approved institutional procedures, to fulfill domestic requirements that may conflict with free trade.

Has Globalization Gone Too Far? reviews the relevant empirical evidence and assesses the likely significance of each of the social conflicts that it describes. The author casts the debate in terms that both economists and noneconomists can join. He rejects the views of some recent observers, such as William Greider in One World Ready or Not: The Manic Logic of Global Capitalism and Republican presidential candidate Pat Buchanan, but acknowledges that there is evidence for serious concern and proposes possible remedies to deal with those real problems.