BEARING THE WEIGHT OF THE MARKET?

Most people in the ad­vanced economies seem willing to accept, most of the time, that economic integration through international flows of trade and finance is a good thing. They acknowledge, for instance, that foreign investment can help poor economies to modernise, and that international compe­tition helps to raise productivity and, at least in the aggregate, in­comes as well.

Yet people also recognise the costs, such as unemployment or lower wages, that integration may force on particular groups at certain times. When weighing these costs of globalisation against the benefits, economists typically point to the role of government. Through taxes and public spending, they say, soci­eties can use some of the extra in­come created by globalisation to cushion the losers. In principle, governments could go further, ensuring that everybody ended up better off. Which is very reas­suring - unless it turns out that integration itself reduces the freedom of governments to act.

The view that globalisation makes it harder for governments to govern has come to be widely accepted. The basic idea is sim­ple enough. Globalisation adds to the reach and power of the market: now even governments, not just firms and people, must bow down before the new mas­ter of worldwide competition.

A government might want to prohibit dangerous or unde­sirable working practices, for in­stance. But if it did, the affected industries might move abroad or shut down, because the new regulation could put domestic firms at a disadvantage in com­petition with foreign producers. Or suppose the government wants to raise taxes and spend­ing. However popular more pub­lic spending may be with voters, the market might well forbid it. In the new global economy, peo­ple and firms can flee to other tax jurisdictions rather than paying an onerous tax.

Governments do not even have their former freedom to de­sign their own social policies, the argument continues. The finan­cial markets now sit as judge; if they deem that a new national health-care scheme or a massive education reform will prove too costly, they will punish the coun­try with higher interest rates or a collapsing currency. In this way global market forces not only rule out the kind of compensa­tion to losers that would make globalisation easier to live with, they also seem to challenge de­mocracy itself.

If this thinking were correct, there would be good reason to oppose further globalisation, or to regret that the process has gone as far as it has. But it is not correct. In part it is muddled and in part it is simply wrong.

New thinking

Politicians in rich and poor countries alike, regardless of whether they were of “the left” or “the right”, began calling for lower taxes and public spending, for lighter regulation of industry, for privatisation of state-owned enterprises, and in general for their economies to be given greater “flexibility”.

In other words, governments have freely chosen to give market forces more sway, in the hope that this will raise living stan­dards. It is odd therefore to say that the global economy has seized power from the state - and it is plain wrong to say that dem­ocratic rights have been trampled on.

Many would argue, however, that things are not so simple. Having started to liberalise their economies, governments were left with less power than they had expected. And having sur­rendered more control than they meant to, politicians found they could not go back. As a result, ac­cording to this view, globalisation is running out of control.

Governments themselves have done a lot to foster this idea. Nowadays no statement on eco­nomic policy is complete, it seems, without a declaration of impotence which says, in effect, “Our plans reflect not what we would like to do, but what the global market requires us to do.” Advancing technology adds to the sense of helplessness. Things that governments could once for­bid or restrict -foreign borrow­ing; imports of computer soft­ware; pornography; political ideas - are now far harder to con­trol because modern communi­cations have eroded the bound­aries between nations.

It is true that when technol­ogy and liberalisation come to­gether, governments can be taken by surprise. Anomalies ap­pear, sometimes requiring further deregulation, at other times requiring new forms of regulation that previously mattered little. It is also true that governments have sometimes done the right things in the wrong order; liberalising cross-border flows of capital without updating regulation of the banking industry, for example, is one of the factors behind the recent series of finan­cial crises in Asia.

Like Topsy

The best and simplest measure of a government’s involvement in the economy is public spend­ing. In rich industrial countries this has followed a persistently upward trend since the latter part of the 19^th century.

True, many governments have tried hard to cut their out­lays and their budget deficits of late. By and large, however, they have succeeded only in slowing, not reversing, the rate of growth of spending. Where budget defi­cits have been reduced, this has been done more by raising taxes than by curbing expenditure.

Over the long term, a gov­ernment’s ability to spend is lim­ited by its ability to raise taxes. In the past 20 years, better interna­tional communications and freer movement of capital should have made it easier for taxpayers to avoid high-tax juris­dictions, putting downward pressure on public spending. Why does this appear not to have happened in a significant way?

The answer is partly that tax­payers remain less mobile than one might think. Financial capi­tal, to be sure, now moves in­stantly from country to country. But once capital has been turned into physical assets such as buildings or equipment, moving it is costly. Governments may grant tax preferences to attract new capital to their countries, but they can continue to tax the profits from physical capital that is already in place.

Labour, in any case, remains far less mobile than capital -rooted by ties of family, culture and language. In recent years, therefore, many governments have reduced their rates of com­pany taxation (as well as grant­ing special concessions for new investment), and have shifted the burden on to people instead. Taxes on wages and salaries have risen. This has more than made up for the fall in reve­nues due to lower company taxes.

Extremely high rates of per­sonal taxation in many coun­tries, notably in Europe, confirm that people cannot readily es­cape the clutches of high-spend­ing governments. It is true that competition among governments has changed the structure of personal taxes in many countries, as the extremely high rates paid by the highest-in­come taxpayers have been cut. So far, however, this has failed to reduce the overall tax burden.

Free to borrow

So much for taxes and spending. What about public borrowing and monetary policy? It is often argued that today’s global mar­ket for capital applies a particu­larly severe discipline in these ar­eas. Again, this is misleading. In the first instance, greater mobil­ity of capital gives governments more freedom of manoeuvre in fiscal policy, not less. By borrow­ing from abroad, they are able to let their spending exceed their revenues by more and for longer than would be possible if their economies were closed to inter­national finance.

Of course, if they abuse this freedom, capital markets will turn against them, and raise the offenders’ cost of borrowing. But this is only like saying that peo­ple who run up too big a bank overdraft will be offered poor terms for further loans. The fact remains that an overdraft facility increases financial freedom, it does not reduce it.

Admittedly, living with fi­nancial freedom can be more complicated than living without it. In particular, the extreme mo­bility of modem financial capi­tal makes monetary policy more difficult to conduct. For in­stance, it has become difficult for governments to peg their ex­change rates indefinitely in the face of adverse circumstances.

The risk of “contagion”, when a crisis in one country leads the market to change its view of prospects in others, is a further complication, as recent events in Asia have emphasised. Nonetheless it remains entirely possible for a government to use monetary policy to steer the do­mestic economy, provided that it is willing to let its currency float. Today’s global capital market only rules out sooner what has always been impossible in the longer term - namely, treating interest rates and the value of the currency as entirely separate in­struments matters. Globalisation has not altered the basic limits: monetary policy can be used to regulate the domestic economy or to regulate the exchange rate, but it cannot successfully accom­plish both goals at once.

Finally, what of the argument that the new global economy makes it impossible for govern­ments to mandate social protec­tion, such as minimum-wage laws, rules on working hours, health-and-safety standards in the workplace, and so forth. Ac­cording to this popular view, if governments grant such protec­tion, they will make their firms uncompetitive and put workers on the dole. Globalisation is thus blamed for a “race to the bot­tom” in economic regulation.

There is no reason why this should be true. Certainly, social protection does carry economic costs, reducing the amount of output that can be squeezed from any given amount of capi­tal, labour and other resources. This is not to say that social pro­tection is wrong. Citizens may well decide the cost is worth pay­ing. But the cost must be borne. The only question is how.

In an economy closed to flows of trade and finance, the cost will take the form of lower incomes. In an open economy, the same must ultimately be true. This basic logic is the same whether the economy is closed, partially open or globalised. The only difference is that open economies with floating curren­cies may experience that fall in incomes through currency depreciation - and thus higher prices for consumer goods-while a closed economy will suf­fer a decline in wages as ex­pressed in the local currency.

The important thing to re­member about social-protection rules is simply that, in econom­ics, you rarely get something for nothing. That is the bad news. The good news is that social-pro­tection rules are as feasible, and in the end no more costly, in a globalised economy than they are in a closed economy.

Much the same goes for fi­nancial regulation, public spending and macroeconomic policy. Governments, always ea­ger to deflect political pressure, may prefer to justify unpopular decisions by pretending that their hands are tied. In truth, de­spite all the changes in global markets, they have about as much, or as little, control of their economies as they ever had.

VOCABULARY:

TRANSLATION NOTES:

However popular more public spending may be with voters, the market might well forbid it –

Каким бы популярным рост государственных расходов ни был… (См. часть Ш, раздел 3, §12)

При таком варианте перевода нам придётся пожертвовать глаголом “may” в функции предположения. Рекомендуется перевести данное предложение следующим образом: Несмотря на то, что рост государственных расходов, возможно, и вызовет поддержку среди населения (избирателей), рынок вполне может воспрепятствовать этому (воспротивиться).

Having started to liberalise their economies, governments were left with less power than they had expected” – После того, как правительства начали либерализовывать свою национальную экономику, оказалось, что у них осталось меньше властных полномочий, чем они предполагали.

Здесь предпочтительнее вместо причастной конструкции использовать придаточное предложение времени.

Text B

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