Does Globalisation Undermine The Welfare State?

Backbencher May 17, 2013 1
Does Globalisation Undermine The Welfare State?

Sami Steinbock analyses at length and discusses the tension between international economic interdependence and national-level welfare systems

Part 3 of 3

The welfare state can, in theory, be undermined economically by globalisation. Firms who source factors of production globally can locate their labour and profits in low labour cost and low tax jurisdictions. What would result from this is a reduction in tax revenues in countries which tend to be those with extensive welfare states. They would then have to reduce expenditure to ease their deficits. However, if that trimming is thereafter accompanied by tax cuts, it can attract factors of production back from the formerly more competitive jurisdiction(s), increasing employment again,  which both increases tax revenue and decreases welfare reliance.

Only recently, in Germany, Volkswagen were exploring manufacturing their cars in China to compete with both Renault and Nissan in the low-cost car market. This would result, in Germany, not only in job losses, but also a loss in tax Philippine-stock-market-boardrevenue for the government from the manufacturing, therefore potentially undermining the welfare state as taxation revenues would decrease and welfare support requirements increase due to increased unemployment. This has been evident in France already, with the automobile industry relocating mostly to countries in Eastern Europe. Labour costs per unit of output in France are high, due to taxes on employers to pay for all the social protections that the state offers. This leads to employers choosing to relocate manufacturing and assembly to Eastern Europe where there are lower labour costs and superior tax breaks. The German automobile industry has followed suit in this sense and recently manufactured their low costs parts in Eastern Europe as well. Sweden also has high production costs with a high rate of taxation, which has led to an outsourcing of business. The UK, on the other hand, has a relatively low corporation tax rate, yet there has still been outsourcing in many corporations and industries, particularly call centres and online services, to countries such as India.

Global free trade is clearly beneficial, therefore, to the managers and shareholders of multinationals. Some observers tend to believe in a trickle-down theory of economic distribution: they believe that although globalisation might lead to a more unequal share-out of the world production “cake”, it will result in a bigger “cake” and thus benefit poorer sections of world society, as well as the better off. Other observers argue that growth will be insufficient to benefit everyone, and that the ‘haves’ will take progressively bigger slices than the ‘have-nots’.

In reality, the negative effects associated with globalisation are often attributable to the inefficient ways that governments react to the challenges to which they in fact themselves contributed. There is no efficiency if one government responds in a completely different way to another on a global ‘issue’. For example, with regard to557698308_68695697e0_o globalisation, one country can react by lowering taxation, removing restrictions on businesses, and encouraging liberalised trade in addition to allowing the economy to concentrate on the sectors and activities where it enjoys a comparative advantage over the other country – in the UK a good example of this is the financial services sector.  Another country, on the other hand, might become protectionist, curtailing trade in certain areas and imposing import tariffs. It restricts labour markets, and the economy and living standards decline. It blames the effects on globalisation, but what really is to blame is the differential approach taken between the two countries, particularly how the second country reacted to changing global challenges.

Sweden between 2008 and 2013 has always been within the top countries in the global competitive league: the UK has remained in the top 15 but with its position dropping as taxation increases, and Germany has not yet dropped out of the top 10. It is clear from this that corporations are willing to operate in countries with higher marginal tax rates such as Germany and Sweden (and to a lesser extent the UK) when social welfare benefits are there to be gained by employees from the higher taxes spent, so that the corporations thereby, in effect, get a net gain in return for their tax money spent. This is best reflected in the decision by Toyota to base itself in Canada – a country with high social benefits yet higher taxation – rather than the USA. In the USA it is more expensive to spend on private insurance for employees, rather than pay the extra taxation in a country like Canada where employees can receive the social benefits.

I am convinced, therefore, in conclusion, that it is not globalisation that undermines the welfare state per se, but instead how countries react to globalisation that either undermines, or even possibly strengthens, their respective welfare states.

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