Blame It on Globalization

In the streets of Paris, the anti-globalization protests of yesteryear have given way to protests against the "anti-people, anti-labor" policies of the French government. The government can blame its tough new pension proposal on the pressures of globalization - French political leaders have made "endless speeches about the need to tame [globalization] and contain it," ¹ says Philip Gordon of the Brookings Institution - but the fact remains that welfare regimes across Europe are threatened more by domestic sources than by international competition.

For years now, critics have argued that globalization will lead to a diminished role for governments in welfare protection and, eventually, to the downfall of the welfare state. There may seem a grim irony in this vision: even as globalization creates a greater need for state welfare than ever before - in order to combat the weakened position of workers and the greater overall instability - it, perversely, also creates strong incentives for nations to downsize their welfare regimes.

Prior to the onset of modern globalization, capital owners were generally restricted to investment opportunities within their national economy, and a government's interest rate policies controlled the rate of return on financial investments. Since all effective competitors were required to produce under the same national welfare regimes, the costs of regulation and social provision could be passed onto consumers. Governments in developed countries used Keynesian macroeconomic policies such as budget deficits and interest rate cuts in times of insufficient aggregate demand to control the economy and promote full employment, and they had the freedom to develop their own brand of welfare system. Continental European and (in particular) Nordic countries were notable for their especially expansive and well-funded welfare regimes.

Now that international markets have become globalized, however, countries with interest rates below the international level risk an outflow of capital, devaluation, and a rising rate of inflation. Similarly, countries with higher costs of doing business - for example, because of welfare-related measures like comparatively high tax rates or strong union lobbies - risk a decline in profits and investment, with firms shutting down or moving production to more favorable locations.

The demands of a globalized marketplace thus threaten to undermine the autonomy of national economies and exert a downward pressure on systems of social protection. As countries engage in competition for locational advantage (higher rates of return and lower costs for doing business), politicians may enter into a downward spiral of competitive deregulation, a "race to the bottom" in which all competing countries eventually find themselves reduced to a level of welfare provision lower than any of them desire.

Taken to its "apocalyptic" conclusion, this scenario could lead national systems of social protection to unravel almost completely due to globalization. More optimistically, national welfare regimes may not be completely dismantled, but rather the institutional, state-centered conception of welfare could yield to a kind of welfare pluralism in which the non-state sector - private for-profit, private nonprofit, philanthropic, domestic - comes to play a larger role in the provision of welfare. ² Either way, European welfare regimes as we know them may not survive.

Overall, globalization has had a limited impact on Western European welfare regimes so far. Western European countries differ enormously, of course, and since the effects of globalization, whatever they might be, are intensely mediated by domestic arrangements, there has not been any great convergence of national social policy structures.

In the 1990s Western European countries witnessed fierce battles over welfare reform that were rhetorically linked to the need for international competitiveness, but at least to date, the empirical record belies the notion of the corrosive impact of economic globalization on their welfare regimes. As shares of GDP, both social transfers and government consumption of services rose over the last two decades in all Western European countries except for Belgium and the Netherlands, and as a percentage of total government outlays they rose everywhere. Public social security and health expenditures as a percentage of GDP have remained essentially stable. Non-traded sectors remain important in most European economies. And public opinion remains strongly in favor of an active government role in managing the economy and administering social programs and benefits.

This apparent resilience of Western European welfare regimes reflects, in part, political and cultural forces that conspire to make radical welfare reform exceedingly difficult. For decades, these countries' welfare regimes have conferred substantial benefits on large groups of voters, creating in the process constituencies who would oppose tooth and nail any significant trimming of the system. The government of Alain Juppé in France lost power by trying to do just that in 1997. France's current government is now facing a huge revolt from organized labor. Such opposition from entrenched interests helps explain how the British and American welfare states were able to withstand the neoconservative assaults of the 1980s; despite the ardently anti-welfare state agenda of Thatcher and Reagan, welfare state arrangements and funding in the UK and US remained essentially stable.

Other data suggest that there has been some measure of welfare state retrenchment in Western Europe over the last two decades, though the process has been somewhat subtle and far from systematic. If we expect that governments will seek to retrench their welfare states in indirect and obfuscated ways so as to avoid blame, spending levels alone will not capture all the moves governments make towards retrenchment and will likely overemphasize welfare state stability and resilience against discontinuity and change. Thus even though welfare state spending levels have increased in both absolute and relative terms over the last two decades, most national indices of social inequality reveal growing disparities, forms of protected employment have experienced dramatic erosion throughout the continent, public sector employment rates have fallen, and in many cases eligibility criteria have become stricter and the duration of benefits reduced. A number of countries have also experimented with privatization of social services. Overall, then, while globalization pressures have not by any means dismantled the welfare states of Western Europe, they have helped lead to the introduction of cost-cutting measures that may in time amount to a structural shift in welfare provision.

For all the popular hype and academic study of globalization's impact on European welfare regimes, the biggest catalyst for change in these regimes has been, and will continue to be, internal/national pressures, not external/global ones. The influential scholar Paul Pierson argues that three "irresistible forces," all essentially unrelated to globalization, are largely responsible for the pressures on welfare states. First, services have displaced manufacturing in advanced economies as the dominant sector, and the low productivity associated with service economies creates a fiscal problem in paying for welfare. Second, these fiscal problems are aggravated by the policy rigidity of welfare states that have come to maturity. Finally, and perhaps most importantly, Western European welfare regimes face highly unfavorable demographics: Europe has now had aging populations and declining fertility rates for many years, and its low fertility rates are likely to continue for many more. As the elderly increase as a proportion of the population, the costs of pensions and health care rise at the same time that the fiscal base for welfare provision is diminished. An already stressed system of social transfer payments will therefore be stressed much further, and the resulting fiscal woes will necessitate budget cuts. "We are clearly in a new era of austerity," ³ Pierson warns.

When considered in this context, it is apparent that globalization has created an agenda for change in Western European welfare regimes, rather than directly causing change - concerns over globalization have helped highlight welfare regimes' need to adapt to domestic pressures. Globalization's role as an agent for welfare state reform has a dual nature: the ideology of globalization associated with international organizations like the IMF and the World Bank provides governments with a certain repertoire of reforms, and the threat of competition coming from globalization provides governments with practical justification for carrying them out. In this way, the specter of globalization can allow governments to undertake painful, but necessary changes to their welfare regimes in pursuit of sustainability. The French government's proposed pension reforms are a case in point. More broadly, the "Third Way" approach (an attempt to synthesize and ultimately transcend the old left/right dichotomies) of several European leaders, most notably Tony Blair in the UK and Gerhard Schröder in Germany, stems from a recognition that new, competitiveness-enhancing solutions will be necessary to sustain Europe's welfare regimes in the twenty-first century.

In the coming years, many Western European governments will try to redesign social insurance systems, move labor policy from unemployment insurance to employability, offer universal but not unlimited health care, and seek out a new public/private mix, among other reforms. They will try to make welfare programs more market- and employment-friendly, and the focus will shift, at least in part, from social protection to social investment. Globalization will help induce these changes in the delivery and design of welfare, but it will not induce any wide-scale retrenchment. Instead of seeing globalization as a corrosive force to be resisted, European social policy makers should see globalization as an agent and agenda for reform, a tool in the fight against the severe internal pressures that pose the greatest threat to their welfare regimes.

1 Quoted in Regnier, Pat, (2002) "What the French Know about Globalization (A Lot More Than They're Letting On...)," TimeEurope Magazine, April 14.

2 Mishra, Ramesh, (1996) "The Welfare of Nations," in Robert Boyer and Daniel Drache, eds., States Against Markets: The Limits of Globalization (London: Routledge), p. 329.

3 Pierson, Paul, (2001) "Introduction: Investigating the Welfare State at Century's End," in Paul Pierson, ed., The New Politics of the Welfare State (Oxford: Oxford University Press), p. 10.