Discussion Paper

No. 2017-42 | July 07, 2017

Karl Aiginger and Heinz Handler

Europe taking the lead in responsible globalisation

(Published in The Sustainable Development Goals—Assessing interlinkages, trade-offs and synergies for policy design)

Abstract

Political opposition to globalisation has risen in industrialized countries, although the positive overall effects on the growth of the world economy and the alleviation of poverty are empirically verifiable. However, the effects of globalisation vary according to regions, professional groups, and education. In the period of intensive globalisation, unemployment and inequality have risen, and people feel their lives to be determined by forces they cannot influence. Since the many new challenges, such as climate protection, can be better solved by worldwide efforts, it is indispensable to avoid new national barriers and to strengthen the endorsement of globalisation and the concomitant welfare effects. However, it is also necessary to respect cultural differences in preferences and to view globalisation as a search and learning process. Instruments for the implementation of such a strategy may vary according to regional specifics. Social and ecological goals – gaining higher importance with rising per capita incomes – are well-represented in the European model, but for worldwide solutions other socio-economic models will offer preferences and solutions. Apart from the announced partial withdrawal of the United States from globalisation and the upcoming dominance of China in world affairs and large scale investment, Europe would be well-advised to take a greater responsibility if not the lead in determining the rules of globalisation. Based on an opinion-forming process within Europe, responsible globalisation can significantly improve the quality of life in Europe and its partners worldwide.

JEL Classification:

E02, E61, F13, F42, O10

Cite As

Karl Aiginger and Heinz Handler (2017). Europe taking the lead in responsible globalisation. Economics Discussion Papers, No 2017-42, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2017-42

Comments and Questions

Anonymous - Referee report

August 15, 2017 - 08:49

see attached file

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Karl Aiginger and Heinz Handler - Reply

September 04, 2017 - 12:15

The report confirms that our strategy proposed for Europe points in the right direction, but suffers from a lack of concreteness, i.e. actors supporting as well as forces working against responsible globalization should be named. This point is well-taken, but it was our primary intention to elaborate on existing attempts to define a concept of responsible globalization incorporating social, ecological and economic aspects in a systemic approach. We agree to make suggestions about actors and opponents in chapter 2, even at the price that this adds to the subjective character of the paper. The main actors should be national governments. They should realize that globalization accelerates the speed, and therefore also the burden, of change, and that – in spite of overall gains – it will also produce losers; in industrialized countries these will be low-skilled workers, in particular blue-collar workers in areas of deindustrialization. This was well predicted by theory (for an early account, see e.g. Slaughter and Swagel, 1997), but economic policy did not invest enough resources to speed-up qualification and to counteract rising inequality (which may come primarily from technology, but this effect has been aggravated by structural change). Within the EU, this task of national governments should be monitored and mandated by the European Commission (e.g. in the Annual Growth Report and the policy recommendations drawn from it); just to name examples, the Commission could take a more decisive lead in accelerating and intensifying the fight against tax evasion and shifting and reforming the emissions trading. Structural and regional programs should promote skill upgrades and new firms, specifically in regions where enterprises are forced to shut down due to globalization. As a third group of actors, NGOs and civic society have to be invited to support structural change fitting the specific conditions of the countries and regions impacted by globalization. To summarize, national governments will have to take the largest part of the job, but need encouragement and support, in part from the European level and from international organizations like the IMF, and also from civic organizations. Opposition to responsible globalization may come from large multinational firms. Due to profit maximization and short-term shareholders’ interests, they may be forced to employ cheap labor, to oppose social and environmental regulations, and deploy harmful resources polluting the environment. This is probably not true for the majority of multinationals, but firms under cost pressure with high lobbying capacity may influence politicians to downgrade standards in trade and investment agreements. In some cases governments in low income regions will welcome investment at any price, accepting environmental damage and inhuman working conditions for catching-up. We acknowledge that we do not define “Europe”, but to an extent this is intentional. Given the complex governance structure in Europe and the broad differences in opinion between the North and the South and the West and the East, between Members of the Eurozone and non-EU countries and the multitude of contracts between the EU and non-members like Switzerland and Norway, we rather take the hypothetical long-term view of a “European entity”. This view is encouraged by the experience of 60 years of European integration which has slowly, and with backlashes and limitations, created a European identity and informal policy coordination. More and more Europeans now acknowledge a European identity in addition to, but not substituting for, the national one (see e.g. European Commission, 2017). And politicians and media correspondents with worldwide perspective do not hesitate to speak about European values, e.g. in case of migration (among the many activities, see e.g. CEU, 2016). Responsible globalization will only work if the quest for responsibility is acknowledged at the same time by citizens and on the level of regions of nations. It must also extend beyond the national level to comprise EU institutions (Commission, Council) and non-EU countries eager to cooperate in several policy fields (research, security, etc.) or to become candidate countries, associates and in some cases finally members. Within the current European Union, shaping globalization, e.g. through trade and investment agreements, needs to be promoted by the Commission, the Council and the Parliament. Given the reservations on globalization in the general public and threats of populism demanding renationalization, the European Parliament with its closer connection to citizens is probably the best actor to push responsible globalization, although it needs the cooperation of the Commission and the Council. Yes, the EU is not a single actor in international organizations, and this is a problem as national interests of Member States may drown any common strategy. This should change in the medium run, given that even the largest European countries tend to be marginalized in organizations whose decisions are voted according to the size of member nations. We can furnish literature closer to the text and add more empirical proofs. The paper is the result of a three years project on the European strategy in which 32 research organizations cooperated and more than 100 working papers and articles were produced. Some more citations can be provided. Concerning labor productivity, we do not talk about acceleration or deceleration (in fact the trend is towards the latter), but consider the growth of and the emphasis on labor productivity as relatively high when compared with the increase in energy productivity. In the long run, and also during the third wave of globalization, the lion’s share of economic growth in industrialized as well as developing countries was contributed by labor productivity. Our point is that policy should not overemphasize labor productivity, because this increases the “growth imperative” (the rate of growth needed to keep unemployment stable). The focus should shift to energy and resource productivity. And as far as the future is concerned, some parts of the literature – the Industry 4.0 literature as well as Brynjolfsson and McAfee (2016) – predict high increases (in contrast to the secular stagnation literature). At the same time the European Commission discusses whether a 30% or 40 % increase in energy efficiency in thirty years is not a too ambitious goal. A rise in labor productivity has advantages and disadvantages, while an increase in energy productivity provides a win-win situation: it reduces costs and tends to increase welfare without boosting unemployment. This priority of “redirecting” technical progress from labor productivity to energy productivity is not reflected in today’s technology policy and should be a characteristic of responsible globalization. Regarding the point of assessing globalization as an advantage vs. the turnaround towards a more skeptical assessment, there remains a puzzle. Survey data by the Eurobarometer (http://ec.europa.eu/commfrontoffice/publicopinion/index.cfm) as well as analysis by Bertelsmann (Böhmer et al., 2016) show that the positive net assessment prevails in the great majority of European countries. This was a surprise also for the authors). The political discussion including the calls for renationalization indicates the opposite. It is likely that there is an asymmetric perception of the gains and losses of globalization: The majority realizes that the gains are larger in the long run and on average, but takes the net advantages as one of the many facets of modern life. In contrast, to the losers a loss of employment due to lower skills is all important and decisive for their lives, and populist parties are quick and successful to build their agenda on such a divide. The comment’s point on less visible gains for consumers and more visible risks for jobs is well taken. For a similar view see Rodrik (2016) who is no absolute apologist of globalization, and he acknowledges that the intellectual consensus for globalization prevails. As long as emigration is dominated by civil wars and large differences in living conditions, circular migration will be negligible. In more normal times, however, circular migration would not only help to contain the number of migrants in receiving countries, but returning migrants could use their acquired knowledge to improve economic conditions in their home countries. “Responsible globalization” would entail support for investments of richer countries in poorer countries, not just steered by the immediate interests of investors (industrialized countries and multinational firms), but also inducing endogenous innovation in the migrants’ original home countries. Our “principles” are designed to reduce and cluster the multitude of instruments available. They are partly founded on empirical facts (see for example that globalization increases choices and is fueled by market forces and technology), and partly rest on our intention to propagate responsible globalization. The principles serve as an umbrella providing the general direction towards more responsibility. They are based also on the intensive research in our international network WWWforEurope and in the policy papers e.g. of the Policy Crossover Center (www.querdenkereuropa.at), but also other think tanks from Bruegel to Bertelsmann, Friends of Europe, etc. with a residual subjective component remaining. The large number of instruments is intentional, since a diversity of instruments may fit to the specific national situation, preferences and development, and diversity may increase the benefits of globalization. Thank you for asking why free trade zones should be under “US” guarantee. This is a typing error. They should be under “UN” guarantee. We have to correct this error. Our reference to the current account surplus of Europe should be seen with respect to its political (not economic) relevance, and refers to recent US proposals to curtail trade with Europe (and China). Per se, surpluses in the current of account are not indicators of success, and the US deficit is partly connected to its role as provider of liquidity. We just argue against the populist fear of Europe losing “competitiveness” due to globalization. The evidence of a European surplus in commercial trade and services makes it at least politically harder to characterize Europe as a loser of globalization. Along these lines, moves by the new US administration to rewrite NAFTA and tax imports are motivated by the large and persistent US trade deficit. Voters seemingly buy the argument that jobs are lost to Chinese imports. China’s admission to the WTO in 2001 has been criticized as a mistake by many observers, among them Lighthizer (2010). Our position is definitely not “anti-US” as far as the traditional US role in securing global stability is concerned. However, in the months preceding the G20 summit it appeared as if the US was about to neglect or even destroy that tradition and give way to nationalist and populist tendencies which would counter the values to which the majority of European countries adhere. Given our goal of responsible globalization, we feel no “bias” when asserting that US governments and large firms have insufficiently pressed for (or even lobbied against) higher social standards, for trade union coverage in developing countries or for taxing emissions and short-run financial transactions worldwide. We acknowledge differences between US states, the positive role of California and differences between administrations. Currently, the USA is about to oppose any treaty which tends to upgrade social and environmental standards, and to induce multinationals to use best technologies in investments in low income countries. Unfortunately, Europe in this respect also lacks sufficient courage, and the current European Commission, for its planned “white book”, even abstained from developing a “reflection paper” on environmental policy. Its reflection paper on globalization, however, develops some ideas in the direction of responsible globalization.

Gian Cesare Romagnoli - Invited Comment

August 19, 2017 - 10:55

Comment to Aiginger K. And Handler H. “Europe taking the lead in responsible globalisation” by Gian Cesare Romagnoli, Università Roma Tre The paper by Aiginger and Handler is built on some phallacies: a. it proposes a role for Europe as if it were a political union; b. it moves from disputable observations i.e. the empirically verifiable alleviation of poverty produced by globalization, while the number of poors has been doubling in Sub-Saharan Africa, remaining stable in South Asia and South America while sharply declining in East-Asia and Pacific; c. it adopts the logic that globalization is to stay, eventhough people objects it, since some public goods are global; d. polls confirm that globalization yields advantages (net?) and this is also the view of the majority of Europeans (sic); e. the loss of European economic power could be slowed by further enlargement to the West Balkans and the Black Sea region, overlooking either the fact that these enlargements increase internal EU economic divergence which reduces potential vertical integration (Rodriguez-Pose, 1999) and, consequently, the chances for a political union, or that the eventual inclusion of Georgia and Belarus in the EU brings with it a serious geopolitical tension with the Russian Federation; f. the past international agreements and the agenda of international organizations were built on the principle of mutual advantage and as win-win contracts for all members (Doha Round?). It is possible that populist requests for renationalization of policy stem from this way of looking at reality.The world population totals now 7.5 billions (United Nations, 2017) and the world income, which amounts to around 40.000 billion dollars, could guarantee to every inhabitant the means to live (per capita income amounts to 5.300 dollars which, according to the World Bank, is over the threshold of the upper middle income countries). This aim is anyway unattainable because of the world income distribution inequality. Even though the per capita income has increased on average, also in the low income countries, the gap with the high income countries keeps growing. In the Nineties, when the Third Wave of Globalisation began, the difference between the average per capita GDP in the low income countries and that of high income countries was 18.373 dollars (OECD, 2016). In 2015, this gap has increased up to 34.000 dollars. The point that “the world is flat” was made by Thomas Friedman (2005) with the expansion of trade, the internationalization of firms, the galloping process of outsourcing and the possibility of networking. On the contrary, with the rise of the New Economy, economic inequalities have been increasing spatially, including the emerging digital divide, as a result of regions attracting talented workers instead of developing skills at a local level. Despite increasing inter-connectivity through developing information communication technologies, the contemporary world is still defined through its widening social and spatial divisions, which are increasingly gendered. Danny Quah (2009) explains these spatial divisions through the characteristics of knowledge goods in the New Economy: goods defined by their infinite expansibility, weightlessness and non rivalry. These divisions in the new economy are much more difficult to overcome as a result of few clear pathways of progression to higher-skilled work. Furthemore the paper produces disputable statements on which the authors take no stance i.e., for instance, “if unemployment and migration coincide”.Finally the paper is prone to wishful thinking: elimination of tax shelters, circular migration, my country first failure (Trump, May, Visegrad countries, Macron?), potential game changing instruments vis à vis market forces, etc. ReferencesFriedman T. (2005), The World Is Flat: A Brief History of the Twenty-First Century, Farrar, Straus, and Giroux, New York. OECD (2016), Income Distribution Database, OECD Publishing, Paris.Quah D. (2009), Knowledge: The driver of economic growth, in Swee-Hock S. and Quah D. (eds.), The Politics of Knowledge, ISEAS and LSE, London, Ch. 4. Rodríguez-Pose, A. (1999), Innovation prone and innovation averse societies: Economic performance in Europe, Growth and Change, 30, 1, 75-105.

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Karl Aiginger and Heinz Handler - Reply to comment

September 04, 2017 - 12:20

The comment starts with enumerating six “fallacies” of our paper. We concede that or analysis and our policy recommendations contain some subjective judgments, but not more than usual in articles proposing a new strategy or concept (look at the other papers on responsible globalization or at the policy documents calling for the renationalization of policies). Some of the “fallacies” are open to more empirical verification, some could and should be discussed at length, for many of them a large literature is already available (maybe we should cite more evidence). Let us start with globalization reducing absolute poverty. This is well established and proven in the vast majority of globalization studies (most recently by Ahmed et al., 2017) and documented not least by the fact that the UN had set millennium goals for poverty which have been reached much earlier than planned. It is true that the reduction of absolute poverty was first dominated by China, but it is now visible in most parts of the world, though with various speeds and depending on the ability of countries concerned to stop population growth and succeed in improving skills. India and Africa are now predicted to have high growth rates. Although the dynamics of poverty reduction can be retarded by political conflicts and by environmental catastrophes, none of the forecasts see globalization as a cause. And the spread of the use of internet (really a consequence of globalization) has virtually contributed to reducing child mortality and improving access to medical support in Sub Saharan Africa). During the third wave of globalization, including the Financial Crisis and its aftermath, the average growth of developing countries has consistently been stronger than that of industrialized ones. It is however true, as acknowledged in the comment, that reduced absolute poverty does not imply reduced relative inequality, but this has also been highlighted by the authors. The “principle of mutual advantage” worked well for decades after WWII. It may have to be reconsidered given the fate of the Doha Round and recent public attacks on other trade agreements. In fact, we argue for better coordination of international organizations, redesigning trade agreements to include social goals and improved democratic control for trade courts. It is basically correct that shaping globalization would be easier for Europe if it were a political union and if the opinions among members would be more homogenous. However, the European Union has learned to cooperate and to shape policy via European institutions (and in some cases also international organizations) without being a political union. The backdrop is that “European” policy stances are at times determined by a group of larger members, and often just by Germany and France. But Member States intensely discuss their positions on international policies and policy directions in general. The EU has demonstrated its ability to draft trade and investment treaties, to react to the financial crisis by stimulus programs, to stabilize the euro and to start a Banking Union. To pursue the goal of shaping responsible globalization, EU governance will need to be reformed. Towards this end, the policy brief “More or less Europe” by the Policy Crossover Center (Aiginger, 2017) provides suggestions for how a strengthening of common policies in the EU can be combined with a larger national scope of action (and the heterogeneity of its members). Whether the extension of Europe strengthens or weakens the power to shape globalization is an open question. We expect that in the long run a larger Europe will be more able to do this than a Europe representing less than 10% of world economic output. The European willingness to accept Central and Eastern European countries as new members has resulted in more diversity, but it has also helped to dissipate European values regarding governance and the Rule of Law. The pressure on accession candidates to preempt conflicts before attaining membership has contributed to stabilizing conflict-prone regions. The transformation of former socialist countries into market economies was the quickest transformation ever seen in history, and the EU has consequently been called an “integration machine” by the World Bank. In a similar vein, Jeffrey Sachs (2008) suggested that US economists skeptical about “Europe” may look at values and successes provided by a Europe without political union (lowest child mortality, high life expectancy, peace, and soft power instead of bombing). It is an established fact that inequality has increased in many (though not all) countries, but the majority of studies blame technology for this (as a reference, see Dabla-Norris et al., 2015). We acknowledge that the interaction between technology and globalization might aggravate the problem, but our recommendation is neither to oppose new technologies nor to push back globalization, but to improve the policy reaction. The disputed statement that problems could arise from the coincidence of migration and unemployment is not merely an economic one, but it is reemphasized in the political discourse and inroads of populist parties. Migration encouraged by demand from countries of destiny (“pull factors”) generates positive effects, but if it is driven by problems in the country of origin (“push factors”, e.g. political conflicts and environmental degradation), it can be disruptive and destabilizing. Again we think policy can mitigate the negative results, but this reaches beyond the normal adjustment process and requires rather focused policy measures. Our statement concerning the positive assessment of globalization by a majority of EU citizens is in line with results reported in the Eurobarometer surveys (http://ec.europa.eu/commfrontoffice/publicopinion/index.cfm/Survey/getSurveyDetail/instruments/STANDARD/surveyKy/2142. These results are also compatible with the notion of positive net advantages and media reports about people opposing globalization. A strategy has to find solutions, some proven and built on evidence, some with judgements and optimism for a better policy. We propose to eliminate tax shelter; we should support the benefits of circular migration, and we should argue that “my country first” strategies reduce welfare in “my” country as well as for my partners. We argue that, on the basis of a number of principles, many instruments are available, conceding that not each and any instrument will fit national preferences. But the goals should be to profit from the shared benefits of globalization and to fight against its negative results. The concept of responsible globalization suggested by many eminent economists is developed here a bit further, to some extent based on intensive research of 35 research teams in wwwforEurope over the past years, and sometimes driven by the judgment of researchers involved in policy consulting. If we cannot convince the referee of comment two we would at least like to ask him or her whether our proposals for a more social and ecological globalization, which at the same time increases dynamics and reduces inequality and unemployment, in principle points in the direction of “responsible globalization” as proposed by Dani Rodrik, Lawrence Summers, Kurt Bayer, Benoit Coere and others.