How should Europe respond to calls for deglobalisation?

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"Hyperglobalisation" really took off when China was reintegrated into the world economy. [Shutterstock]

The last wave “hyperglobalisation” concluded with the onset of the financial crisis. It is important to take stock of the fruits of globalisation and decide whether Europe should welcome or alternately promote a new policy, writes Karl Aiginger.

Karl Aiginger is the director of the European Policy Crossover Centre-Vienna Europe and professor of economics at Vienna’s University of Economics and Business.

Hyperglobalisation began around 1990, boosting world exports relative to GDP from 15% to 23%. It accelerated investment, technology and information transfers, extending into cultural, political and religious dimensions.

It was promoted by international organisations and treaties, and it saw the reintegration of China into the world economy. Firms began outsourcing to distant countries, creating “global value chains”.

Economic theory stresses the advantages of trade, which enables the deeper specialisation of countries and a better use of abundant resources in both the north and south. However, theory has also predicted that there will be winners and losers.

In the north, the greatest winner being capital and skilled labour, the losers are the unskilled, whose labour is substituted by imports from the south.

Since overall gains are larger than losses, the losers can – theoretically – be fully compensated. In the south, low-skilled labour will be utilised more intensively, and capital invested in sheltered, domestic-oriented industries is expected to lose. As technology disseminates, lower income countries are expected to grow at a faster rate.

During the wave of hyperglobalisation, output boomed, with average growth rates higher than 3% (implying a doubling of world output in 25 years). Growth was even higher in developing countries, while income inequality across countries declined.

In the north, multinational firms and profits boomed, while wage rates declined. Income inequality within countries increased. At the same time, wages, in particular those of low-skilled workers, remained fairly constant (Europe) or declined (in the US).

Unemployment rose in the low-skilled segment. In the south, absolute poverty and child fatalities plummeted at a faster rate than even the UN Millennium Goals had sought. Somewhat unexpectedly, however, income inequality within developing countries also rose, as a split occurred between workers able to cooperate with multinational firms and migrants from rural areas.

Despite the overall beneficial results for the north as well as the south, resistance to globalisation has increased. Anti-globalisation movements and populist parties are booming even in relatively prosperous European countries (Netherlands, Belgium and Austria). Brexit and US presidential elections have underlined the power of anti-globalisation campaigns.

One reason for this development is that policy has ignored the losers. Instead, it has supported the winners by offering tax loopholes. The losers have neither been compensated for their losses nor provided with the capacity to take advantage of the change.

Unemployment due to globalisation has been amplified by a technology shift calling for higher skills. Third, unemployment has increased due to lower growth as a result of the financial crisis and, fourth, due to immigration driven by political and ecological problems in home countries.

This combination of these four interacting causes which increase low-skilled unemployment can only be resolved through a similar joint reaction of fiscal and technology policy, in addition to the re-training of labour and the redistribution of incomes. Silo strategies which emphasise goals separately will not work, if the unemployment originates from the interaction of four causes.

Globalisation will be hard to extend if policies do not change. Policy changes can lead in two main opposing directions. The first would be to renationalise and introduce new borders, as promoted by the populists (and sometimes also environmentally motivated de-growth activists).

This avenue will increase unemployment in industrialised countries and halt the decline in poverty in emerging economies. The incomes of the poor will decrease at a much faster rate than those of the wealthy, as the poor have tended to purchase low-priced goods provided by globalisation.

The second and better policy change would be to make globalisation more responsible with respect to societal goals. This requires three pillars:

  • A reorientation of government. The public sector should not call for new resources (above the 50% required today) but rather restructure taxes (ranging from labour to energy, emissions, bequests, tobacco and speculations), reshuffle expenditures (from subsidies for fossil energy and agriculture to innovation and social investment) and provide the current losers with the capacity to switch to new jobs;
  • Systematic changes in European economic and societal policy. Technical progress should be redirected from labour saving to resource saving, internalizing emissions costs in transport, as well as switching from GDP to Beyond GDP goals as a measure of performance;
  • Long-run cooperation with neighbours. Europe should invest in the future growth and stability of its neighbourhood, much as the ERP program did after World War II, reducing political, cultural and religious tensions.

Europe is not at all a globalisation loser. Its external balance in trade and services is positive and its surplus is increasing. Europeans clandestinely know this, reporting on balance in the Eurobarometer that globalisation is a good thing (while perhaps not using this knowledge in elections).

In this situation, Europe should not follow the wrong turn of the US, but rather adopt a frontier position in the shift towards “socio-ecological globalisation”. This specific European answer should be offered to both its citizens and partners. As a result, the 21st century could still become Europe’s century, as Europe may then provide the better model for a high-income region.