March 13, 2008

Globalisation and the Welfare State

Most people on the British left are free traders or fair traders- we do not oppose globalisation and do not expect it to make real differences to the way that government policy in the UK works. That might seem counter intuitive. Afterall competitive pressures you might assume will lead to arguments for diminishing the welfare state to become more powerful over time. Essentially the welfare state often supplies through its payments a floor to the kind of wages and conditions that companies can offer, and as cheaper labour comes to the market, you would expect governments to adjust welfare provisions downwards both to enhance competition and to lower tax rates. Well that's not actually true. A study by a set of German academics (A. Dreher, J. Sturm and H.W. Ursprung) for the journal Public Choice (pdf*) finds that globalisation has made very little difference to the composition of public spending. They suggest that we might have over-estimated globalisation as a phenomenon and that some of its effects may be blurred. However they also argue that this lack of consequences stemming from globalisation for public expenditure, arises because there is a compensatory effect- that politicians are rewarded for compensating their constituents who fall out of work and who might fall out of work. The fear of the consequences of globalisation mitigates those consequences in a paradoxical way. Its an interesting finding- it doesn't alter the way that the economics of globalisation- but it does remind us that that does not determine what we do about globalisation.

The point is that economics does not always lead politics, especially in a democracy. Democratic power, manifested in the ballot box, creates incentives to mitigate the consequences of loss and I would argue that demonstrates not merely the justice of democratic systems but also their stability. It is because of a democratic system, that some measure of equality is preserved despite the inegalitarian consequences of competition. In this sense the argument about globalisation is part of a larger argument about the way that democracy goes hand in hand with a just and stabalising social policy. It would be interesting to see whether that's true and whether the spending policies of dictatorships and democracies say in Latin America are very different and also to see what impact compulsary voting has upon the way that governments spend money. Overall though, because this is a dual study of policy in the OECD and in a larger collection of countries, I think its possible to say that the responsiveness of politicians to electorates has led to different policies being created. The fact that most current governments see their legitimacy as rising from the people, not descending from some other authority, leads them to a situation in which they are constrained in their actions.

Ultimately when it comes to globalisation, the constraints to appealing to public legitimacy seem to cancel out the constraint of global market pressure.

*The article is only free for a while, so it may become unavailable at some point in the future.

Crossposted from here