Donald Trump, Brexit, populist pressures across the EU: are we entering a full-blown crisis of international liberal capitalism? There is no doubt that globalisation poses policy challenges for governments. But globalisation by itself did not force governments to adopt policies that have divided their countries, exacerbated inequality and hit social mobility. Many of them did that by choice.
The problem is not that we have opened the way for an increased role for markets, as many on the left (and on the populist right) argue. Markets remain the best way of generating wealth and opportunities, of challenging vested interests and of expanding people’s freedom. We are in this mess because we’ve forgotten the lessons of the post-war period. Basically, we have a crisis of distribution and opportunity.
Globalisation has played a crucial role in reducing poverty globally over the last 30 or so years. But there are winners and losers from increased trade and capital movement, as there are from technological change, and many governments, notably the US and the UK ones, have failed to take the necessary corrective action. Contrary to the anti-globalisation proselytising of the left, the US and UK governments could have acted; they were not prevented from doing so by the “forces of globalisation.” And, globalisation does not, as the liberal economic right tends to argue, require governments to reduce social spending, emasculate unions and cut taxes on the wealthy.
Successive American and British governments were not forced by “globalisation” to allow executive pay to balloon. While most developed economies have experienced rapid pay growth at the top, nowhere has the boom in boardroom pay been as big as in the Anglo-Saxon countries.
Similarly, the US choice to slash taxes for the wealthy over the last 35-odd years was a domestic one, ostensibly aimed at releasing animal spirits and driving entrepreneurship. The recently passed Republican "tax reform" is the latest in a long line of tax cuts for the rich and the corporate sector that have failed to stimulate investment and productivity growth, but which have contributed to alarming levels of US inequality. American governments were not compelled to do this in order to retain the confidence of international investors. After all, other developed countries opted against such cuts and have not suffered for it.
The allegedly negative impact of immigration on the wages of low paid workers has become a big political issue, not least in the UK. But there is little, if any, evidence of this impact at all. Indeed, welfare cuts and changes to tax credits have had an incomparably bigger impact on the incomes of poor UK households than has competition from immigrants.
“American and British governments were not forced by ‘globalisation’ to allow executive pay to balloon”Globalisation did not force western governments to engage in damaging austerity. Developed countries were not constrained by the need to “compete” for capital in a world of global capital markets. Some eurozone governments were certainly constrained from boosting public spending in an effort to counter the economic downturn, but this reflected the strictures of eurozone governance, not globalisation.
All that said, there have been losers from the changes. But this does not mean globalisation is a bad thing—or anything remotely close to that. Some people—generally the better-educated—enjoy the fruits of free trade without suffering any of the down-sides. For others, the costs and benefits can be more evenly balanced.
Governments need to spend more money helping regions whose established industries have been wiped out by increased international trade or technological change. Some countries have been successful at doing this, investing in active training policies, and infrastructure in affected areas. Others, notably the US and the UK, have been less effective in doing so.
Some things do require greater international governance. Multinationals can pay tax where tax rates are low rather than where they generate their revenue, encouraging governments to lower taxes on business. This means having to raise revenue elsewhere, and has tended to mean higher taxes on low to average earners, and on consumption. Globalisation has also made it easier for high earners to avoid tax, because it is now more straightforward to hold wealth offshore and the wealthy derive much of their income from wealth.
Multinationals should be taxed where they generate their cash flow or add value, not where tax rates are lowest. Closer coordination between national tax authorities is making it harder for the wealthy to hold wealth offshore, but here too there is a long way to go. In the meantime, national governments could also do more to ensure that their tax systems are equitable, for example by increasing taxes on immobile factors, such as land.
Economic growth has been weak for a decade and living standards of median households have stagnated or fallen, notably in the UK, while social mobility is under pressure. The responsibility for these trends does not lie with remote, unaccountable global forces, but largely with national governments. Globalisation does not render them powerless. And where it does reduce their policy space, they can cooperate to bolster their influence.
