The Quest for Security

Protection Without Protectionism and the Challenge of Global Governance

Joseph E. Stiglitz, Mary Kaldor

• Publisher: Columbia University Press
• Year: 2013
• ISBN:
  9780231527651
• Topic: Politik & Internationale Beziehungen
• Subtopic: Nationale Sicherheit

The essays in this collection boldly confront the quest for security arising from the social, economic, environmental, and political crises and transformations of our century. Joseph E. Stiglitz and Mary Kaldor begin with an expansive, balanced analysis of the global landscape and the factors contributing to the growth of insecurity. Whereas earlier studies have touched on how globalization has increased economic insecurity and how geopolitical changes may have contributed to military insecurity, this volume looks for some common threads: in a globalized world without a global government, with a system of global governance not up to the task, how do we achieve security without looking inward and stepping back from globalization?

In each of their areas of expertise, contributors seek answers to questions about how we achieve protection of those people who are most insecure without resorting to economic, military, or mafia protectionism. Some have suggested that the turmoil in the Eurozone "proves" the deficiencies in the welfare state. This book argues that the superior performance of Scandinavian countries arises from their superior systems of social protection, which allow their citizens to undertake greater risk and more actively participate in globalization. Some suggest that we can address terrorism or transnational crimes through the strengthening of borders or long-distance wars. This book develops the proposition that such approaches have the opposite effect and that only through spreading the human security experienced in well-ordered societies can these dangers be managed.

This book also examines how these global changes play out, not only in the relations among countries and the management of globalization, but at every level of our society, especially in our cities. It explores the potential for cities to ensure personal security, promote political participation, and protect the environment in the face of increasing urbanization.

1

Social Protection Without Protectionism

Introduction

The conference at which these papers were presented occurred just months after the collapse of Lehman Brothers. It was clear, at that point, that the world was entering the deepest recession since the Great Depression seventy-five years earlier. Unemployment would inevitably rise. It was unclear how long and how deep the downturn would be—and years later, as this volume goes to press, those uncertainties remain. One out of six Americans who would like a full-time job still can’t get one. In Spain, the official unemployment rate exceeds 24 percent, but youth unemployment is twice that.

The Great Recession affected almost every country in the world. Unlike previous crises that came from the periphery (the developing countries), with the developed world striving to insulate themselves from the impact, this was a crisis that came from the United States. It risked bringing down with it countries throughout the world, affecting poor people and countries far less able to withstand these economic vicissitudes.

The Great Recession gives a special poignancy to the papers and discussion of part 1 of this volume—the provision of social protection. The crisis raises questions about the basic capitalist model, and especially its stability, as George Soros emphasizes in his comment in chapter 3. It raises, too, questions about globalization, about how responses to previous crises and the global financial architecture and institutions had contributed to the making of the crisis and its rapid transmission around the world. The policies of financial market liberalization and deregulation were based on notions of market fundamentalism, the view that markets were self-regulating; ideas that had little empirical or theoretical support before the crisis but that have since become thoroughly discredited. But the international institutions (like the IMF and the Financial Stability Forum) had pushed these policies, often on unwilling developing countries, telling them that such policies were necessary for long-term growth and stability. That they did so—and that in the aftermath of the crisis, there was no system of “social protection” in place either for those countries that were adversely affected or for their citizens—suggests some fundamental weaknesses in the system of global governance, a subject touched upon by several of the contributions to part 1. The international financial institutions have been dominated by the advanced industrial countries and by those in the financial sector within those countries. These are issues to which this volume returns in part 5.

Most of part 1, however, is concerned with social protection: how social protection is affected by and affects globalization. Joseph Stiglitz argues that globalization has increased the need for social protection, but that it simultaneously has reduced the capacity of nation-states—still the basic unit of governance in our global economy—to respond. Many of these consequences are not inherent, but are a result of the way globalization has been managed, bringing us back to the critical question of global governance. Of particular concern has been the asymmetric nature of globalization, where there has been greater liberalization of financial markets than of labor markets, weakening workers’ bargaining power, with resulting adverse effects on wages. Moreover, a race to the bottom drives tax rates down, with businesses threatening to move elsewhere unless taxes—especially on businesses—are kept low. Many claim that globalization demanded the weakening of social protections and wages, leading to a curious contradiction: While globalization was being sold as bringing benefits to all, workers (in response to globalization) were being told that they had to accept these drastic changes that visibly made them worse off (Stiglitz 2006). Presumably, in the long run (the argument went), they (or their great grandchildren) would be better off. As Keynes pointed out, in the long run, we’re all dead. Blue-collar workers in the United States had seen their standards of living erode over a quarter century. It was no wonder that so many had turned against globalization. The power of the prevailing paradigm was so strong that most did not reject globalization directly—they only demanded a fair globalization.

Finally, liberalization combined with deregulation has exposed those in developing and developed countries to additional shocks.

Leif Pagrotsky, a long-time member of Sweden’s social democratic government, argues that this interpretation underestimates the positive contribution of globalization: The competition to which it gives rise has provided a spur to innovation and economic restructuring that are essential to economic growth. How countries respond to this competition is, of course, one of the central questions addressed by this volume. They may respond by protectionism, closing themselves off, or they may reply by devising systems of social protection. The Scandinavian countries took the latter route.

The chapters in this section—and especially that of Karl Ove Moene—explain why Scandinavian countries took that route and why the system of social protection that they constructed was so effective. The analysis goes beyond narrow economics to a broader understanding of politics and society.

The prevailing wisdom in recent decades has argued for stripping away social protections, lowering taxes, providing greater reliance on individuals to protect themselves—a move away from the state toward markets. This was supposed to lead to higher growth, which would benefit all. Economists have typically depicted a trade-off: One can only get more equality and security by giving up on growth. The Scandinavian model challenges these presumptions. The Scandinavian countries have the highest taxes in the world and the strongest system of social protection; yet, in most metrics, they also have the highest standard of living, with lower inequality, better social indicators, and dynamic economies. They have embraced globalization perhaps more than any other region in the world.

These outcomes are not an accident; stronger social protections have been one key part of their economic strategy. The central message of part 1 is that equality (equity), economic security, efficiency, and dynamism (growth) can be complementary. Societies with greater social protection can be more dynamic and more open to globalization. Of course, it matters how one designs the social protection system. Globalization (and more broadly, the increased pace of technological innovation) should not lead to the stripping away of the system of social protection, but to its redesign.

The economic argument has several components. The first, and most traditional, has been especially relevant recently: Systems of social protection act as automatic stabilizers, sustaining aggregate demand in the face of an economic downturn, and thus contributing to economic (and social) stability.

Second, in countries with better social protection, individuals are more able and willing to undertake risk. Risk-taking is at the center of a dynamic economy. As Moene puts it, stronger social protection facilitates the economy’s ability to engage in the Schumpeterian process of creative destruction.

Third, higher minimum wages and—more broadly—a compressed wage structure provide incentives for firms to upgrade the skills of their workers. It shifts comparative advantage toward more skilled sectors, and this too leads to a more dynamic economy. (As an example, some economic historians argue that the imposition of the minimum wage played a critical role in the transformation of the U.S. South from a backward region dependent on very low-wage workers.)

But probably more important than the economic argument is the political and social analysis, which highlights how economic policies affect social cohesion. Voters are more willing to support globalization (with its attendant risks) if good systems of social protection are in place. More broadly, in societies in which there is more equality, there is greater social cohesion and—accordingly—a greater willingness to make efficiency-enhancing public investments.

Moene also argues that there is an “equality multiplier.” More social cohesion results in greater support for policies that promote equality and social cohesion, including better social protection. As societies become more egalitarian, they become more sensitive to inequities and work to address them. In short, societies with greater equality do a better job at solving the collective action problem.

Although the success of these countries is widely recognized, there are those who talk of “Scandinavian exceptionalism.” These are institutional arrangements that work for these countries, with their high degree of homogeneity and broad social consensus. To the contrary: There are good theoretical reasons why we should expect these outcomes. Scandinavian countries did not always have the degree of social cohesion they have today. What one sees today in these countries results in part from the welfare state.

Of course, there are other aspects of the economic and social policies in Scandinavia that contributed to these successes. Moene emphasizes, for instance, the role of trade associations. Some of the complementary policies can, in fact, be thought of as part of a system of social protection. High investments in human capital (perhaps spurred on by the challenges posed by globalization) enhance the ability of individuals to move from job to job, reducing both private and societal costs associated with job loss. Gender policies—bringing women into the labor force—may have been driven by broader views of what a good society should look like, but families with two wage-earners are far better able to withstand shocks. Moreover, the demand for efficiency, to which globalization gave increased impetus, means that one cannot underutilize half of a country’s potential human capital. The Scandinavian countries recognized this and developed policies to ensure greater labor force participation while enhancing the capacity of families to respond to the inevitable strains that resulted. These countries recognized the problems and, in response, devised policies that worked remarkably well.

No country can simply adopt wholesale institutions from another. Each institution is part of an “ecology,” and systemic change—altering the entire system—is no easy matter. The particular system of social protection that has worked so well in Scandinavia will have to be adapted to reflect the circumstances and conditions in other countries. The message that comes out of these papers is clear: One can design effective systems of social protection that enhance economic security—an important aspect of individuals’ sense of well-being. Well-designed systems of social protection can contribute to a more dynamic and more stable economy—and to a society and economy that are more open to globalization.

These are ideas that should be adopted by the international economic institutions (the IMF and the World Bank) that play such a large role in shaping economic policies in developing and emerging markets. These institutions have been cheerleaders for globalization, but the policies they pushed for a quarter century under the Washington Consensus undermined support for globalization, and for good reason. The failure of these institutions is in part related to deficiencies in global governance and is one of the reasons that reforming global governance (including the governance of the international economic institutions) is so important—a theme we return to in part 5.

Reference

Stiglitz, J., 2006, Making Globalization Work, New York: W. W. Norton.

1

Social Protection Without Protectionism*

JOSEPH E. STIGLITZ

The various papers in this volume highlight different dimensions of the rise in insecurity. The increased threat of terrorism may have decreased our sense of physical security. With growing numbers of Americans not covered by health insurance, there is an increase in “health insecurity.” In addition, global warming confronts everyone around the world with an important new set of environmental risks. This chapter focuses on one key dimension of insecurity—economic insecurity.

In spite of the social and economic progress of society in recent decades, in many countries—both developed and developing—individuals have less economic security today than they did earlier. This is especially true in the United States. As the International Commission on the Measurement of Economic Performance and Social Progress observed, our measures of GDP do not adequately reflect this important aspect of well-being (Fitoussi, Sen, and Stiglitz 2010). If they did, improvements in the standard of living would be less than current measures suggest.¹

Today the world is immersed in a global financial crisis.² The risks and uncertainties are unprecedented. No one is sure how this crisis will evolve. In the years after the Great Depression, we erected in the United States and many other advanced industrial countries a set of social protections. But in the United States and some other countries, the last three decades have seen these social protections weakened—in the name of increased economic efficiency.

The arguments for doing so, at least in some cases, were of dubious merit.³ For instance, the shift from defined benefits retirement programs to defined contributions has imposed more risk on individuals and, by weakening the economy’s automatic stabilizers,⁴ increased economic volatility. As markets crashed in 2008 and 2009, many saw their life savings disappear before their eyes. Those who had looked forward to a comfortable retirement now face unprecedented anxieties as they confront their old age.

Other changes have simultaneously decreased equity in our society and increased economic volatility. Social protection programs (relative to the size of the economy) have been scaled down, and the degree of progressivity of the income tax system has been reduced.

The weakening of social protections has, from a macroeconomic perspective, both adverse demand and supply-side effects. Individuals who see their income and (retirement and housing) wealth erode will cut back on consumption—especially in the United States, where the average household savings rate has been near zero. The increased risk (associated not only with retirement but also with unemployment) is also likely to contribute to increased savings—especially in a country where the need for precautionary savings for medical and other emergencies is so great, especially if the safety valve of being able to borrow has been dampened down.

With strong anti-age discrimination laws in the United States, there is a further supply-side effect in labor markets: Many who otherwise would have retired may be forced to work longer. With the supply of labor increasing and the demand for labor decreasing, unemployment (open and disguised) will increase. This will, of course, put more downward pressure on wages, exacerbating the already increasing inequalities in American society.

As the effects of the financial crisis begin to be felt in the real economy, unemployment will increase.⁵ The official unemployment rate will underestimate the stress in the labor market—large numbers will drop out of the labor force, others will take part-time jobs simply because no full-time jobs are available, and still others will claim disability benefits. The official unemployment rate is likely to hit 8 percent to 10 percent, the effective (“real”) rate will be at least 50 percent higher, and the unemployment rate in certain marginalized groups (youth, minorities) will be greater still.⁶

Unfortunately, in recent years, unemployment insurance has been cut back, to the point that less than 40 percent of the unemployed receive benefits, and the replacement rate (the ratio of benefits to normal income) has fallen, to around a half (compared with three-quarters in some European countries).

Even before the crisis, those in manufacturing were facing problems. The pre-crisis excesses—a bloated financial sector garnering for itself 40 percent of all corporate profits and a real estate sector absorbing forty percent of all investment—will compound the challenges of restructuring the economy. Unless the hoped-for government stimulus package is well constructed,⁷ it will do little directly for those in manufacturing, real estate, or even in finance: Those in the financial sector are not likely to retrain themselves to work on road construction crews.

Social changes, including the weakening of unions, have heightened these problems. Job protections are weaker and, in Europe, there is ongoing pressure to weaken them further in the name of labor market flexibility. Enhancing the ability of individuals to move from one job to another has obvious efficiency benefits. However, imposing high costs on individuals by stripping away hard-won protections also has obvious costs—a loss in security, which has received too little attention. The rhetoric of increased labor market flexibility is often just a code for lower wages and fewer job protections. The question (to which we turn later in this chapter) is, can we have more labor market mobility with greater security? Although some countries may have struck the balance too much in favor of security, the United States may have gone too far in the opposite direction.

In many developing countries, matters are even more dire. The consequences of weakening job protections are worse because economic volatility in these countries has been increased as a result of capital, financial, and trade liberalization (see the section “Globalization and Social Protection” later in this chapter).

In the face of these uncertainties, demands for protection are inevitable. So concerned were the G-20 leaders about such demands that one of the few commitments undertaken at their first meeting in Washington in November of 2008 was a commitment to not resort to protectionism in response to the crisis.

This chapter argues that a need for enha...

Table of contents

• Cover 
• Half title
• Title
• Copyright
• Contents 
• Acknowledgments
• Editors’ Note
• Introduction: The Quest for Global Security
• Part 1: Social Protection Without Protectionism
• Part 2: Protection From Violence
• Part 3: Environmental Protection
• Part 4: Urbanizing the Challenges of Global Governance
• Part 5: Global Governance
• Contributors’ Notes
• Index