Globalization and the end of the welfare state?

Globalization and domestic policy autonomy have been viewed as irreconcilable realities. Sovereignty is under severe stress due to international economic realities that get manifested in trade rules and national policy decisions. How constrained are states in their domestic policy making abilities b international trade rules? Is it really a constraint? Is the constraint absolute or limited? Is national sovereignty a thing of the past taken over  by the realities of international trade? Critics have also argued that as a result of the limits on domestic policy making, the welfare state too has receded. The active involvement of the State in economic decision making too has seen a general decline.

Is it the end of the welfare state then? Katherine Wall in this piece seems to think so. Highly critical of globalization's impact on domestic sovereignty she states:

"More explicitly, economic globalization, in its most recent form, has been limiting the capacity of states to determine their own policy outcomes in three main ways: through trade and economic integration; financial markets; and the competition for employment. Due to the increasing pressure of international competition in trade markets as well as the increased mobility of capital and multi-national corporations, states are incentivized to cut labour costs, to reduce the price of goods and services, reduce taxation to make their domestic market more competitive, and to decrease the size and scope of the welfare state.

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The human world is complex and there are likely to be a variety of causes of the retrenchment of welfare policies in developed states, like the UK. Ideological commitment to welfare provision, domestic institutional frameworks, and the local specificities of each economy, mediate the extent to which globalization impacts on the extent of policy making autonomy within nation-states. Nevertheless, the root cause of this shift has a global economic foundation. Without increased economic integration and dependency, without the opening of capital markets, without competition for employment and specialization it is unlikely that states would be forced to choose between economic growth and social welfare provision. In an era of new economic, social and political challenges, when welfare services and support needs to expand to meet need and demand, globalization is limiting the range of policy options available to states, limiting state sovereignty, entailing a retrenchment of the welfare state in developed nations. If the state no-longer has the capacity to provide the economic and social rights its citizens demand, the question is, what or who will?"

Is the international economic order that restrictive? Many feel that the nation state has not lost its relevance even though globalization has gained prominence. Other international trade law experts feel that there is sufficient scope within international trade law to exercise domestic policy space. Thus, this pitting globalization against domestic sovereignty would not entirely be true. We also notice that inspite of reduction of trade barriers and protectionism, States do play an active role in national discourse. Globalization has not impacted many areas of domestic discourse. The State is at liberty to pursue its national agenda based on democratic decision making in almost all areas of governance. International trade rules do not proscribe the role of the State in providing benefits. Neither does it prescribe an economic model to be followed by the State to engage with its citizens. An active "State" is not necessarily an anathema to globalization subject to the restrictions that WTO law places on every State. 

Ofcourse, it cannot be blatantly protectionist or discriminatory.There are limits to State sovereignty but it does not imply that the role of the State in disbursing welfare and providing for its citizens is impacted drastically.One normally takes extreme positions in the debate on globalization - either that State sovereignty is completely eroded and a state of doom is in store or that globalization offers all the answers that the State cannot. the truth, like everywhere else, is somewhere in the middle. It is the constant endeavor to find that middle ground that must engage policy experts and administrators.

Random musings on Protectionism, Globalization and the Third Way

                                      (Photo Credit: loco's photos - Flickr)

The respective roles of the State and market has long been a subject of intense debate in a globalizing world. Closely linked to this is the role of free trade and protectionist policies in a country's developmental agenda. Are there any "right" answers in this debate? Or are the contours of this debate blurred? This blogpost does not seek to offer any answers to the complex issue of the role of the State, free trade and protectionist policies in international development. I came across a few pieces that do touch upon this topic that I thought would be worth sharing:

1.No Third Way to the Market: Milton Friedman has argued that privatization should go the whole hog in sectors which require it. Critical of the role of the State in a market economy, he argues against piecemeal privatization that, according to him, is more counterproductive. Offering examples of partial privatization of the airline industry and the Postal Industry in the U.S. he concludes:

"Few rules exist for overcoming this tyranny of the status quo. But one is clear: if a government activity is to be privatized or eliminated, do it completely. Do not compromise by partial privatization or partial reduction of state control. That simply leaves a core of determined opponents in place who will work diligently (and often successfully) to reverse the change."

 2.Is the Great State debate Outdated: Arguing that appropriate policy decisions should be taken at appropriate levels of local, state, national and global governance, Kemal Dervis has argued that public policy must take into account these stratification.

"In today’s interdependent world, the debate about the role of public policy, the size and functions of government, and the legitimacy of public decision-making should be conducted with the four levels of governance much more clearly in focus. The levels often will overlap (infrastructure and clean energy issues, for example), but democracy could be greatly strengthened if the issues were linked to the levels at which decisions can best be taken."

3. Stop Complaining about Outsourcing: Relying on the positive impact comparative advantage and good old division of labour has on the economy, Sheldon Richman argues that there is no alternative to liberalizing trade and reducing the role of protectionism since the latter hurts the less privileged more than the rich. It concludes by saying :"Global cooperation beats trade war every time."

4. Seven Moral Arguments for Free Trade: This 2001 Cato post summarizes the arguments in favor of free trade and open markets. While some of the points are definitely contestable, the general thrust of the arguments seem to suggest that a protectionist, state led model hurts the poor more than the well off.

"When all of the arguments are weighed, it should become clear that a policy of free trade is moral as well as efficient. Free trade limits the power of the state and enhances the freedom, autonomy, and self-responsibility of the individual. It promotes virtuous and responsible personal behavior. It brings people together in “communities of work” that cross borders and cultures. It opens the door for ideas and evangelism. It undermines the authority of dictators by expanding the freedom, opportunity, and independence of the people they try to control. It promotes peace among nations. It helps the poor to feed and care for themselves and creates a better future for their children. For which of these virtues should we reject free trade?"

5. Free Trade is Not the Same Thing as Protectionism: Finally, I had to end with Simon Lester's pick questioning an article that equated seeking increased access to markets with protectionist tendencies of imposing antidumping and countervailing duties. Though not related to the debate, it underscores the need to be consistent with policies that impact local markets as well as access to outside markets.

6.The Economics of Outsourcing: America need to understand and adapt to such developments: Essentially arguing for free trade, this piece emphasizes that the globalized world is here to stay and the response to it is not protectionism but participating in it.

"Freer trade and cheaper communications have spurred globalization in recent decades, exposing once-insulated parts of the economy to foreign competition. Americans can’t cling to the jobs of the past. We need to find the best opportunities in the global economy. In the new international division of labor, we can be the managers, consultants, and even facilitators of outsourcing.

Trade and new technologies are a lot alike. They both upset the existing economic order, undermining some products, industries, and professions while giving rise to new ones. America’s prosperity has been built on wave after wave of such upheavals, with new jobs continually replacing old ones. That’s why American workers are insurance salesmen and dentists, not blacksmiths and buggy-whip makers. We don’t have to know exactly where the new jobs are. We only need faith in the American people and the capitalist system.

Politicians’ attacks on outsourcing won’t work any better than the Luddites’ assaults on technological innovation. If their argument prevails, it is a path to decline. America will be better off if we grab the opportunities arising out of globalization. That is the only thing that will work."

The random musings throw open myriad issues related to the role of the State, markets and international trade in the developmental trajectory of a nation. Do international trade, reduced barriers ipso facto lead to improvements of living conditions of the marginalized? Does trade enhance the capacity of people to engage in the market? For people outside the formal economy, what role does international trade and access to markets have in improving living standards? Does the role of the State always create negative impacts? While questioning State capitalism or other forms of State support, it is often forgotten that large industrialized economies of today were also built on heavy State support and encouragement. It is often brought to light that State subsidies in free market economies are also pretty large. Thus, is the debate of State vs. markets a simplistic one? Does the WTO framework prevent the State from being an active partner in the developmental path? Can their be a constructive role of the State in the globalized world which recognizes the power of the market and global interconnectedness but harnesses the regulatory intervention of the State? For some the State is a bad word while it is the market for others. Can we go beyond these constructs to find the middle path? Is there a middle path at all?