Summary:
Martin Wolf on benefits and perils for the West of rising global prosperity. Major disadvantage is competition for scarce resources. However, it is a trend that is unstoppable, and West needs to embrace it rather than oppose it. The question is: how much openness to trade and movement of capital and labour should there be? Large minority of people in US believe free-trade policies are not in their interest. US needs to shift provision of security from employers to the state: corporate welfare states are unsustainable in a dynamic and open economy. Solution according to Wolf is raise taxation of the rich so as to distribute the spoils of globalisation more evenly. Wolf does not agree with Summers' argument for international action against tax competition and increased international agreement on regulation. Globalisation being used as an excuse for low taxes. (Published: 20/05/08)
Notes:
- Larry Summers recent two columns on globalisation
- international economic policies of the US need to be coupled more closely to the interest of its works
- interests of citizens of high-income countries more important than those of others?
- on the contrary; morally compelling view that increases in incomes of the poor offset equivalent losses for the rich
- however: politics is national
- unless/until a global political community emerges, politics will respond to perceptions of national interest
- But to say deny that the rising prosperity of China, India etc may not be in the interests of today's high-income countries is equally absurd.
- spread of prosperity
- big advantages:
- wider distribution of innovation
- bigger opportunities for profitable exchange
- cfr. rise of US and benefits thereof brought to the UK
- greater political stability in previously impoverished countries
- big disadvantage:
- greater competition for scarce resources
- e.g. power: if country A has more, country B has less
- if commodity prices rise, the terms of trade (relative prices of exports and imports) of net importers will deteriorate
- countries have to sell more exports to obtain given imports
- US terms of trade have deteriorated by 1/8th as commodity prices have soared and the currency devalued
- has turned an 18% increase in real gross domestic product between Q4 2001 and Q4 2008 into a 16.4% increase in real national income
- Willem Buiter: nothing rational can be done to halt the diffusion of knowledge, skills, technology, management systems, etc.
- US launching an unprovoked blockade or even war against China and India?
- to mention such ideas is to reveal their strategic and moral bankruptcy
- halting flow of ideas?
- UK tried to halt spread of technology to the US in early 19th century and failed
- Chinese empire once made it a capital crime to export silkworms and failed
- protectionism against the emerging countries?
- might slow their growth but would not halt it
- would guarantee a breakdown in international relations that threatened hopes of a peaceful future
- what cannot be helped must be accepted!
- given the rise of the emerging world, should the developed world limit the globalisation of its own economies?
- so long as high-income countries depend on imports of commodities, trade will be essential
- self-sufficiency is a mirage
- Question is: how much openness to trade and movement of capital and labour should there be?
- well known that
- free trade is in the interest in the country adopting the policy, unless it has monopoly power
- the benefits and costs are likely to be unevenly distributed
- particularly likely for trade between rich and poor countries
- free movement of of capital and labour may also harm important interest groups within a country even if it raises aggregate income
- the freer movement becomes, the harder it may also be to impose taxes and regulations on those able to move
- Summers notes that it is hard for a democracy to proceed with policies that a large minority believes are against its interests
- if the fall-back position is not to be protectionism, more creative options must be chosen
- US: need to shift provision of security from employers to the state
- corporate welfare states are unsustainable in a dynamic and open economy
- but: means taxes will have to be raised
- Summers: argues for international action against harmful tax competition and greater international agreement on regulation
- may make sense in area of finance
- otherwise unpersuasive
- if Sweden's taxes can be 56% of GDP, it is not tax competition that keeps the US at just 34%
- mobility of capital and people is an excuse, not a justification for low US tax levels
- desperately need an honest debate about these issues
- debate would reach four conclusions:
- whether or not citizens of high-income countries welcome it, the global spread of economic development is ineluctable
- protection against imports is a costly and ineffective way of dealing with the consequences
- parties of the centre-left should argue for redistributing the spoils of globalisation, not sacrificing them
- a necessary condition is higher taxation of the winners
- chief obstacle there is political will
- globalisation is not a reason for low taxes, but an excuse; should be discarded
- Opening of the world economy is the West's greatest economic policy achievement
- would be tragedy if it were to turn its back on the world when the rest of humanity is at last turning towards it
