POSC 106 - International Political EconomyIntroduction
With the advent of economic globalization in our contemporary world, questions have been asked about the predicament of the welfare state in the face of increasing free market-orientation. Three viewpoints can be readily and broadly identified. Pessimistic outlooks for the welfare state describe it as being in crisis (Mishra, 1984), under threat (Lowe, 1999a), retrenched (Mishra, 1990) or even dismantled (Community Development Project, 1977). Yet, in direct opposition to such pessimism, there are arguments that the welfare state remains as resilient or robust as ever (Le Grand, 1991) and there is still much hope yet for worldwide welfare (Greve, 2006). Still, there are considerations made to access the reality in more neutral terms that attempt to capture the durability of the traditional welfare state, while at the same time not discounting the inevitable changes that modern economic globalization brings about. The welfare states in such a perspective have been thought to be in transition (Johnson, 1987; Esping-Andersen, 1996), refashioned (Wicks, 1987), reshaped (Johnson, 1990), restructured (Sullivan, 1996; Wilding, 1992), reconstructed (Johnson, 1990), and recalibrated (Ferrera, Hemerijck & Rhodes, 2001).
Welfare statism, whose policies is considered socialist and of a state-controlled and redistributive nature, is considered to be opposed to economic globalization which is popularly regarded as the propagation of free markets and liberalization. Economic globalization has been defined as the expansion of international trade in goods and services, increasing international flow of capital, internationalization of production through transnational corporations and global commodity chains, growing significance and role of supra-state organizations, and increased propagation of liberal virtues and economic ideas (Glatzer & Rueschemeyer, 2005). Further, the definition of economic globalization can be refined for the purposes of this paper to include greater interconnectedness, greater emphasis on efficiency and a generally increasing transference of the responsibility of provisions from state to corporation. These traits of economic globalization give rise to the popular sentiment that the welfare state is losing its power of control and autonomy over public expenditure to the distributive determination of the free market.
What truly then constitutes an accurate portrayal of the predicament of the welfare state in these trying times of economic globalization? What has changed across the world with regards to welfare, and do all changes occur at the same rate? If there are indeed changes abound, what then is the significance of these differentials and what mitigates the impact brought on by economic globalization which lead to these different rates of change? What, indeed if any, are the prospects for the welfare state?
Habermas (2001b) describes the dilemma that national governments face today as being derived from the zero-sum game which dictates that optimal economic goals can be reached only at the expense of social and political objectives. Welfare restructuring has been a universal phenomenon particularly over the last twenty years (Stephens, 2005). Bonoli and colleagues (2000) define four main factors of economic globalization that pressure the ‘retrenchment’ of the welfare state. First, globalization imposes inescapable competition on states, constraining the autonomy of national policies particularly towards taxation and labour. Secondly, there is a decreasing tolerance for taxation to fund welfare interests. As international markets expand, taxes have to be reduced in order to compete internationally for foreign investment and prevent capital flight. Thirdly, states are increasingly adopting a neo-liberal stance in policy-making. Lastly, there is a ‘squaring of the welfare circle’, referring to the simultaneous and contradictory pressures from opposite directions experienced by governments. Higher spending is demanded to counter the rises in ageing population, demand for education and training, unemployment, and expectations that social progress involves higher standards of service. Yet concurrently, contraction of state provision is called for in view of the concern about the impact of globalization, the logic of liberalism and fears of tax revolt.
In the light of economic globalization, economic power has steadily become the new currency for political power. This is echoed by Habermas (2001b) as he states that “power can be democratized; money cannot” and that “money replaces power” in the new economic world order, which has also outlawed war, colonialism and coercion (Ikenberry, 2008). But is this really happening and, if so, to what extent? To access the impact and its extent of economic globalization, this paper will turn to a regional analysis of the alleged decline of the welfare state in Europe and Asia. This will be carried out by looking at general markers of social and welfare orientation in states such as employment, poverty and inequality levels, social benefits and levels of freedom of movement of states in policy-making, such as taxation and social security provision.
Decline of European Welfare
European welfare states have been described as the most well-developed and extensive (Sapir, 2005), where many countries enjoyed full employment during the golden era of the post-war Keynesian welfare state. In spite of this, there is an increasing general consensus that a great degree of social legislation introduced in recent years has subordinated welfare to primary neoliberal interests (Bonoli et al., 2000). With Sweden as a case in point, the increase in unemployment from 2% in the late 1980s to 9.5% in 1993 is the most obvious implication of the impact of economic globalization (Stephens, 1996), and this was echoed in other Nordic countries. Sweden had to utilize an austerity package and other crisis measures in order to combat an economic crisis in 1990, leading to reductions in social benefits (Olsson & McMurphy, 1993; Stephens, 1996). This trend of austerity has been found in the rest of Europe as well, in what Pierson (2001) terms the ‘politics of austerity’. Unemployment has since stayed at a historical high of around 8% which signalled a ‘paradigm shift’ away from trying to restore full employment. Freer movement of money and capital has inevitably resulted in greater integration of the Swedish economy in the global market place (Mishra, 1999), resulting in a diminished ability of the state to exercise political power over the citizenry, let alone redistribute in favour of welfare. Real interest rates increased from 1.4% in the 1960s to 5.6% in the early 1990s (OECD, 1995), which was caused by the elimination of controls of international and domestic financial markets. Interest rates then became more susceptible to determination by the market rather than governments. International competition pressured prices and taxes to be kept lower, compromising the post-war social contract whereby the state and tax payers fed welfare (Cox, 1987). An ideological shift, particularly in Britain, was called for towards the neoliberal consensus as Margaret Thatcher imposed radical reforms in favour of capital over labour. From this, another feature of European states emerging, altered, from a strongly welfare structure is the shifting of the burden of uncertainty from the government to the individual. Studies have found that social security and risk-protection has declined as dependence on the market increases (Bonoli et al., 2000). At any rate, the golden era of the post-war Keynesian welfare state in Europe is no longer relevant in today’s global context marked by economic globalization (Kwiek, 2007).
Decline of Asian Welfare The forecast for the welfare state in Asia appears equally, if not more, bleak. In Asia and other developing nations, state-citizenry relations have been largely paternalistic until recent global economic development which saw them opening up to trade. Trade has often led to a significant undermining of the state’s sovereignty and ability to ensure public social security. As is observed, many corporations from the economic core have entered developing Asian countries to capitalize on lower costs and have thus dictated the lives of many underprivileged according to the forces of the market. The focus on comparative advantages has also led some Asian countries with inexpensive labour and cheap natural resources to a ‘race to the bottom’ which leaves them exposed to exploitation (Rudra, 2008).
As China and India continue to pursue greater integration with the world economy, other Asian countries are facing increased competition for markets, foreign capital and labour. In the attempt to gain opportunities in participating in the growth of China and India, social policies have been compromised (Asher & Nandy, 2006). Poverty has increased from the declining ability of the state in providing welfare particularly to rural areas as well as in cushioning the increasing prices of necessities, such as food. For example, in Vietnam where poverty has risen, over 20% of the rural population cannot meet their daily nutritional requirements even if they were to spend all of their income on basic food supplies (Chandrasiri & de Silva, 1996). In the case of South Korea, economic globalization led to a social contract crisis, as strong economic growth was not complemented with necessary socio-political development. The lack of proper institutional resources to counter the impact of economic globalization led to rising unemployment in South Korea from 2.5% before the 1997 Asian financial crisis to 9% between 1998 to 1999, and poverty rose by four-to-fivefold (Harris, 2002). The greatest beneficiaries of economic globalization – China and India – are also not spared from the negative welfare consequences of their rush to develop economically, as rising poverty and inequality plague particularly the lives of non-elites (Sahoo, 2007).
The Impact of Economic Globalization on Europe and Asia: The Verdict An objective analysis of the general trend of Asia and Europe would definitely point to the undermining of the capacity of the state to provide for welfare by economic globalization. In both regions, capital interconnectedness has led to market dependence that is shaped by all who participate in it, such that the degree of freedom of one state to make decisions for itself is diminished as the effects of its policy-making is pegged to outcomes elsewhere. Likewise, a crisis in one part of the world has the ability to affect the stability of states in another area of the globe (Krugman, 2008). The decreasing ability of states to exercise traditional sovereignty in taxation and the waging of war, increasing unemployment, subordination of social benefits to economic gains and rising inequality have surfaced along with economic globalization. Advocates of the decline of the welfare state will see the absolute reduction in state power to provide welfare as evidence that the welfare state is in crisis.
Rebuttal Against the Decline of Welfare In spite of the evidence highlighting the attack of economic globalization on welfare states and welfare provision around the world, a body of literature exists that argues against the demise of the welfare state. Mature welfare states in the world, particularly exemplified by northwestern Europe, have been found to be robustly durable against social erosion brought about by globalization thus far (Glatzer & Rueschemeyer, 2005). A large part of their GDP has gone towards public funding. An analysis of this, as will be discussed later, indicates that when there are newly-created social security issues that cannot be countered by traditional forms of direct intervention, strong states have the capacity to and will attempt to channel resources elsewhere to ‘make up’ for it. A host of reasons motivate this, but the general direction that states choose to implement these policies is still oriented in the way of social protection. These findings are also bolstered by assessing the reaction of South Korea, Thailand, Indonesia, Malaysia and the Philippines towards both economic globalization and the 1997 international financial crisis. In all countries, the global and economic repercussions only served to re-ignite interest in social policy as an important aspect of state policy in order to counter the risks and uncertainties brought about by economic globalization. There is also more awareness of the growing domestic demands for social policies, including population ageing, shifts towards more technologically-based economies and urbanization (Gough, 2001).
On the whole, although welfare state restructuring has led to some blurring of regime styles, there are no clear indicators of any complete overhaul of the boundaries that have defined welfare state models of these mature welfare states in the post-war period. This applies particularly to modes of financing, personal coverage and benefit provision. Some quantitative changes have occurred, but all countries qualitatively still exhibit strong similarities to the welfare state make-up inherited from the past (Obinger, Starke & Moser, 2009). These rejections of the idea that the welfare state is in decline also propose that the prospects for the welfare state, regardless of economic globalization, are still as promising as ever.
Mitigation of Anti-Welfare: What Accounts for it? It must be noted that, historically, trade dependency and perceived economic vulnerability in the open economy of Europe enhanced the domestic power of labour and produced a strongly ingrained ideology of social partnership, leading to the formation of institutionally comprehensive welfare states that served as a security blanket against the vicissitudes of world markets (Cameron, 1978). Immunity against the harmful effects of globalization for these mature welfare states is thus constituted by their strong and prolonged historical integration into the world market, successful fiscal and international trade policy-making, a sustainable domestic balance of power between unions and government, a strong ‘naturalization’ of welfare generosity where social benefits are popular and difficult to eradicate, the ability to adapt and evolve to remain globally relevant, and economic and political stability both domestically and internationally which negates the need for dependence on international organizations (Glatzer & Rueschemeyer, 2005).
In many cases, the highly productive economies of these mature welfare states are supported by their socially-oriented policies, and the institutional structures of such mature welfare states are also deeply embedded and have been found to persist even in the face of unpopularity. Additionally, social policy in once strongly welfare states that have evolved into advanced capitalist societies can operate through state intervention to compensate for the inadequate welfare outcomes of the labour market (Gough & Wood, 2004). In so doing, these advanced capitalist societies have retained the very feature of their original strong welfare orientations. The generous welfare states of northwestern Europe were built in open economies around the interests of exposed sector employers and workers. Therefore, social policy was not only compatible with export competition but also contributed to competitiveness by enabling wage restraint and providing collective goods valued by employers, such as labour training (Huber & Stephens, 2005). Welfare state resilience in spite of economic integration even suggests that the effects of economic globalization may not be all that detrimental to welfare states, directly challenging the presently mainstream view echoed by Habermas (2001) that welfare is opposed to economic globalization. Trade is a source of economic growth which may generate fiscal resources necessary for welfare states to remain (Obinger, Starke & Moser, 2009).
In the case of northwestern Europe, while social benefits have not been significantly cut, taxation has been increased against the odds of global market pressure to make pension schemes still viable, clearly indicating the ideological durability of civil society towards welfare and the stubbornness of the social contract in major parts of Europe. In an assessment of welfare transformation in small open economies, welfare dismantling, notably in unemployment cash benefits, was strongly compensated for by expansion in other welfare aspects such as family policy or long-term care (Obinger, Starke & Moser, 2009). Even if economic globalization constrained social expenditure in states, some of these pension and wage modifications merely resulted in a modestly declining rate of welfare expenditure at most, but did little to turn around the fact that welfare expenditure still remained high and formed the primary proportion of state budgets. While there was a decline in welfare state expansion and an increase in private sector growth, public social service employment remained strong especially when contrasted to the increased unemployment that the private sector in most countries face now. Bureaucratic constraints also continued to work against radical departures from established welfare state models (Pierson, 1996).
On the other hand, however, the tendency for welfare and social provisions to be diminished by economic globalization has been found to be more prevalent in poorer developing countries (Garrett & Nickerson, 2005). Many lower and middle-income countries face balance-of-payments problems due to imperfect integration into the world economy which often leaves them vulnerable to intervention by international organizations, such as the International Monetary Fund and the World Trade Organization. From such a perspective, conditions enforced by external entities thus compromise more strongly on the automony of these countries and, likewise, their public is subjected to pressures and harms brought about by economic globalization without the social safety nets that developed states can provide. Developing countries also compete based on the comparative advantage of cheap labour, which places them in a locked-in position where their social security is often undermined by corporate interests (Glatzer & Rueschemeyer, 2005). Here, the negative impact of economic globalization as documented in the earlier section where the ‘race to the bottom’ was referred to becomes more evident. Some states, such as India, have compromised on food self-sufficiency by struggling to gain competitive advantages in niches that serve the only interests of affluent purchasers, leading to food insecurity (Sharma, 2000). While developed states can retain their welfare regimes to bolster the effects of economic globalization and even use social policy to reap further gains from the market, such welfare regimes cannot easily be produced in poorer regions of the world where states suffer problems of governance and labour markets are imperfect and partial (Gough & Wood, 2004).
A state’s level of democratization also creates another dimension along which the effects of economic globalization on welfare either become more pronounced or diluted. Democratization was found to significantly mediate the expected decrease in government spending dynamics due to economic globalization. In countries that became more democratic between the 1980s to the 1990s, increasing market integration was associated with much faster growth in state spending, but the opposite was true in countries that did not democratize (Garrett & Nickerson, 2005). This phenomenon is accounted for by the democratizing state’s increasing ability to adapt and evolve to remain globally relevant. The political stability of democracies breeds stronger governments with better policy-making abilities, allowing these democratized states to grow economically and indulge in greater public spending (Glatzer & Rueschemeyer, 2005). Welfare groups also gain political strength through democratic regimes where values of liberty and freedom are espoused. With greater communication channels between various civil society groups and international bodies created by economic globalization, different welfare and social groups have a greater voice in protesting against various features of globalization (Graham, 2002). Here, the same tools of international communication that facilitate economic globalization are used in opposition to the social insecurities economic globalization brings about. The multitude of issues and agendas – both domestic as well as global – that came together in opposition to the World Trade Organization in Seattle as an example, illustrate the diversity of sources of opposition to globalizing strategies of capital and states, particularly to those strategies which ignore health, social and environment protection (Yeates, 2001). Democratization positively correlates with states’ level of development, which further strengthens the view that development is a mitigating factor for the impact of economic globalization on welfare.
A General Framework of Welfare State Vulnerability With a clear distinction identified between developed and developing countries in terms of welfare state vulnerability, a more concise framework that captures the impact of economic globalization can hence be formulated.
First, whether states react well to globalization is structured by their status within the global political economy. Second, states’ room for manoeuvre in pursuing and implementing globalizing strategies is mediated by national social, demographic, cultural and economic trends, institutions and traditions. Third, states’ margin of operation is determined by the balance of political power between the state, labour, capital and civil society. Put simply, there are strong differences between what different states can ‘get away with’ and developing states simply flounder on every aspect. Despite the supposed overarching power of globalization, the national balance of political power may be decisive in respect of how far national states can accommodate globalization (Yeates, 2001). The tendency for the welfare of developing states to be detrimentally affected by economic globalization therefore exists, as they lack the sound political, industrial and social infrastructures to weather the storm.
Democratization and economic globalization, taken together, also promote the growth of public spending rather than prevent it. Democratic welfare policies strengthen democratic citizenship by giving material and organizational support to subordinate groups and by reducing differences in social status and social power (Rueschemeyer, 2001). Thus, social welfare decreased accordingly when countries globalized and integrated in the world market economy but did not democratize (Adsera & Boix, 2001).
Conclusion Economic globalization has undeniably led to restructuring of the welfare state. However, whether such restructuring can be seen as a decline in the welfare state – as undermining the strength of the state’s ability for welfare provision – is doubtful. Some countries have displayed remarkable resolve in curtailing the effects of economic globalization by channelling more resources towards maintaining welfare provisions, even if the state’s autonomy is diminished. The state merely has to demonstrate an attempt to curtail the effects of economic globalization to still remain relevant as ‘socially-oriented’.
However, not all countries have displayed the same capacity to deal with economic globalization and provide alternative forms of welfare support in the face of increased market dependence, uncertainty and risk. The analysis identified state maturity and democratic strength as two major factors.
Therefore, it is pertinent to say that, in absolute terms, the freedom to manoeuvre for welfare is indeed compromised by economic globalization, but in directly addressing the question about the impact of economic globalization on the welfare state, the welfare state certainly remains resilient with its own means of mitigating the negative effects of economic globalization. This is particularly true because only the poor developing countries, whom we do not traditionally consider to be strongly welfare states at all, face the most reduction in welfare. Thus, with the notion of the traditional welfare state defined by Cameron (1978) in mind, the impact of economic globalization has indeed been mild on the welfare state. The prospects for these mature welfare states remain promising even in the face of growing uncertainty, as they can be assured of their capacity for state intervention if faced with negative market fluctuations of expanding international capital flows, interconnectedness, risk and uncertainty.
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