Policy Papers


De-globalization and the search for economic security

Jim Tomlinson |

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Executive Summary

  • Alongside trends towards globalization in post-war Britain have been powerful trends towards de-globalization.
  • De-globalization has arisen both from structural change in the economy - broadly the transition to a 'service economy'- as well as from deliberate state action.
  • Alongside the long-term trend to increase welfare spending nationally, that state action is most strikingly evident in the growth of public sector employment in the old industrial areas of Northern England, Scotland, Wales and Northern Ireland: of course, that growth is now going into reverse following the Coalition's expenditure cuts.
  • We now have a powerful but largely unspoken policy of what can helpfully be described as 'regional Keynesianism', with the state playing a major direct, as well as indirect, role in offsetting the failings of the private sector in providing employment.
  • While these forces of de-globalization have no single source, insofar as they are matters of deliberate design they are best seen as reflecting a strong impulse to search for economic security to counteract the insecurities generated by globalization.

Introduction

The current recession has re-ignited debates about globalization, debates so far dominated by the expression of worries that the current recession will lead to a damaging backlash against what are seen as the benefits of this process (see, for example, the series of pieces in the Financial Times, 4 January 2011). Such arguments depend, of course, upon highly contentious assessments of the economic effects of globalization. Debates about these effects are hugely important, but they are not the ones directly engaged with here. Rather, the aim is to suggest we need to draw on history to think about globalization, and its effects on Britain, in a rather different way.

Contemporary arguments about whether the current recession will cause a backlash against globalization fit into a narrative which sees globalization as characterised by long-run cycles, in which the process advances and retreats in a uniform fashion over time. Such an approach fits with the predominant historical accounts of modern globalization. These accounts have tended to stress its cyclical aspect, with notions of a 'first great age of globalization' in the modern period after circa 1870, a subsequent phase of retreat or de-globalization stretching across the two World Wars, followed by a gradual emergence of a renewed upward movement after 1945, accelerating markedly in the 1980s.

These cyclical accounts assume that globalization is clearly moving in one direction at any one time - either advancing or retreating. In this policy paper I argue that this is an unhelpful way to think about globalization in a country like Britain, and that not only is the historical pattern better thought of as one of concurrent 'advance' and 'retreat', but that this concurrence provides an important element in understanding the historical underpinnings of contemporary economic developments. The argument is not, of course, that processes of globalization have not been operating in Britain for a very long time, but that, especially since 1945, these have been accompanied by very important counter-tendencies: to 'de-globalization'.

For the purposes of this argument, (economic) globalization is conventionally defined as the extent to which a country's product, capital and labour markets are internationally integrated, and therefore the extent to which the economic welfare of a country's citizens are dependent upon economic events outside the national borders.

The old staples and the post-war settlement

The post-war settlement constructed in the 1940s attempted to address the traumatic consequences of the inter-war collapse of large parts of the extraordinarily globalized industrial economy of pre-1914 Britain. That economy was dominated by the 'old staples' of textiles, iron and steel, shipbuilding and coal, all of which plunged into crisis after 1920. Any recurrence of that mass unemployment and patchy social security seemed to the architects of the 1940s settlement to be profound threats to a liberal economy and polity, and so Keynes, Beveridge and their allies sought to stabilise the labour market and provide support for those deprived of work income through whatever cause.

The policies which emerged in the medium-term from the 1940s debates combined a broadly Beveridgean expansion of social security with much more active macroeconomic stabilization policies. But the effects of the latter on the underlying buoyancy of the labour market were largely indirect, and the policy that did most to directly secure employment in the old globalized industrial areas of 'Outer Britain' was regional policy, which provided significant incentives for investment in these areas. A major reason for the success of these policies, almost entirely unanticipated in wartime discussions, was the encouragement they gave to multinational manufacturing enterprises, initially especially American companies, to invest in the areas previously dominated by the old staples. Thus in the 1950s and 1960s these areas were being simultaneously de-globalized by the declining role of the 'old staples', but also 're-globalized' by the expansion of multinational companies. In Scotland, for example, this included Chrysler, Peugeot and Hoover in the Glasgow area, Timex and NCR in Dundee.

All of the old staples and sectors largely dependent upon them, such as railways, shed enormous amounts of labour after 1945. Many of these industries were nationalized in the late 1940s, and - wholly unexpectedly to its advocates - nationalization provided an effective framework for a relatively 'humane' pattern of rundown from the 1950s onwards. Sectors such as textiles that were not subject to public ownership also lost huge amounts of labour, usually in a context of the British government seeking to slow the decline or ameliorate its consequences without inhibiting its long-term progress. General buoyancy in the labour market (aided by state investment) reduced the pain of these contractions. But insofar as that buoyancy was a consequence of multinational capital inflow, it also increased the vulnerability of the areas to future re-shaping of the patterns of that investment.

De-industrialization and de-globalization

The 1970s and 1980s emphasized the continuing vulnerability of much of the industrial economy to global forces. Trade liberalization in these decades exposed the remaining employment in the old staples to a further major squeeze, so that by the end of the 1980s they were no longer significant employers. The numbers employed in the coal industry, for example, fell from 230,000 to 57,000 in this decade, in iron and steel from 150,000 to 31,000. This liberalization also exposed newer industrial sectors, especially engineering and metal-based consumer products, to unprecedented competitive pressure, as they too shed labour on a large scale. Finally, many multinationals radically revised their global strategies, and this led in particular to the demise of many of the branch plant operations which had been so important in the 1950s and 1960s. All the Scottish examples given above had closed or radically reduced in size by the end of the 1980s.

That Britain de-industrialized after the mid-1960s is well-known (the per cent of the workforce employed in manufacturing fell from 35 to 15 per cent between 1965 and 2000). While the pace and timing of this process differed across the advanced industrial countries, it was evident in all of them. Partly this reflected the rise of new competitors in what had been the 'Third World'. In this regard it fitted in with narratives of a major upward shift in globalization. But de-industrialization also reflected major shifts in the demand side of the economy, as higher incomes shifted consumers away from increasing desire for manufactured goods towards proportionately higher demands for services, a trend accentuated in its effects on employment by the much greater difficulty of raising labour productivity in most service industries than in manufacturing (most services are inherently labour intensive compared with the production of manufactures).

Thus de-industrialization meant a decline in employment in industry, but in so doing also fed into a process of de-globalization. While the shrinking (in employment terms) industrial sector of the economy continued to 'globalize', the significance of that trend for the national economy diminished, as many fewer people found employment in that sector, which was most directly exposed to global forces. Hence the well-known trend to the growth of service employment has acted to significantly counteract globalization. While some private service activities are intensively internationally traded, such as parts of financial and business services, most are not. As a result, the upsurge of manufactured imports from China and India over the last twenty years has directly impacted on relatively few producers in Britain, as their numbers and employees were already much reduced before this process began. This influx of cheap manufactured imports has, of course, had a significant positive impact on the living standards of consumers, though this effect is limited by the relatively low weight of manufactures in household budgets. A typical household in Britain spends only around 25 per cent of the total on such products.

Globalization and the consumer

In the early decades of the 'first great globalization' of the modern era, circa 1870-1900, consumers in Britain gained enormously from cheapening food, above all because of the once and for all 'opening-up' of the temperate agricultural lands of North and South America and Australasia, combined with tumbling transport costs. This reduction in food costs was the great economic benefit of globalization, doing much to offset the effects of the periodic international financial and economic crises which were the downside of that process.

Such benefits are unrepeatable. Not only did they depend upon the finite process of European exploitation of largely virgin lands, their scale also reflected the centrality of food to the average Briton's spending - with typical working-class households spending around half their incomes on food. Today we both import a much smaller proportion of our food and we spend a much smaller proportion of our income on food (under 15 per cent). So, as with manufactures, globalization in terms of changing the prices of what we consume is now much less significant than previously, because we spend much less of our income on internationally traded products, both manufactures and food.

The state and globalization

The other major long-term 'de-globalizing' force has of course been the rise of the state. It has long been suggested by some political scientists that the relative level of globalization of different national economies correlates with rising levels of public spending, as workers have sought a safety net in the face of the enhanced economic instability accompanying globalization. There is evidence going back to before 1914 that workers in some countries saw such a safety net as a better alternative to protectionism and price controls, given the cheap food and market-expanding benefits of globalization. In Britain, we can see the traditional Liberal attachment to globalization being taken over by the rising Labour Party, and then combined with a search for ways of managing the national economy, without a fundamental breach with internationalization. (It was, of course, a Conservative-dominated government which decisively reversed globalization after 1931.)

In recent times, especially since the 1970s, the safety net in Britain has been under pressure. The treatment of the unemployed has become noticeably less generous, encouraging many benefit recipients to migrate to disability benefit with its more generous provision. The picture is complex, because overall expenditure on benefits has continued to grow, despite all the ideological attacks on 'state dependency' and the like. Similarly, other areas of welfare spending have survived the periodic assaults of those seeking to 'shrink the state'. While unfavourable comparison can certainly be made with the level of social protection offered in some other European states, the broad generalization that as globalization has increased, state welfare has grown to offset, to at least to some degree, the instabilities it brings, still holds water.

But alongside the battles over the scale of public spending on welfare there has been another much less-remarked trend which has contributed greatly to 'de-globalization' i.e. reducing the economic vulnerability of the British population to international forces. This is the geographically differentiated growth of state employment, such that in much of old industrial Britain the public sector provides a large fraction of local employment and - with the secondary effects of the incomes accruing from that employment - plays a key role in determining local prosperity. We might usefully refer to this process as 'regional Keynesianism'. It deserves this epithet because it involves the use of the state to offset the shortage of jobs provided by the private sector, just as Keynes advocated, but in a geographically focused way that Keynes' emphasis on the national economy did not envisage.

The scale and variation of reliance on direct public employment are striking. Official figures show this varies from around 10 per cent in the south east to over 30 per cent in the north east. It is possible these figures are underestimates. In the city in which I live, Dundee, which on the official count has just under 30 per cent in this sector, an alternative calculation would push the figure up to around 34 per cent. But even if we take the official figures we are observing a hugely important phenomenon, especially, of course, because of the indirect effects of this state employment on the regional economy.

Of course, government support for employment in the regions of the old staples is not new. As already noted, after limited attempts in the 1930s, post-war governments, with varying degrees of enthusiasm, successfully subsidised private sector employers to locate in these areas (for a while backed up by tight controls on investment in more prosperous regions). Like welfare spending, this kind of regional policy has taken a lot of ideological flak, but has survived albeit in less ambitious form. However, while it is one thing for the state to provide financial incentives to the private sector to locate in these areas, it is quite another for the state to be so directly involved in the provision of such levels of employment.

The precise dynamics of this process of 'regional Keynesianism' seem to have been little examined. Central funding of local authorities has been part of the story, as central government grants have favoured areas with high levels of social deprivation, almost always a proxy for shortage of employment. A similar process may be at work in health, where spending is partly a function of local need, again highly correlated with employment conditions. What is less clear is how far employment concerns have explicitly shaped locational decisions in education. In higher education there is certainly recognition that universities now play a vital role in many local economies, though that is not the same as saying employment considerations have significantly shaped spending on these institutions.

There remains much to be explained about how 'regional Keynesianism' has taken such strong root. We need to explain not only the administrative, but also the political mechanisms that have created these patterns. But what is clear is that the combination of shifting demand patterns and the rise of the state, especially as a direct employer, now means that workers in the old industrial areas of Britain are much less vulnerable to global forces than they were fifty or a hundred years ago. Most workers in these areas are employed either in private sector services, most of which are not internationally traded, or in the public sector, where the level of activity is largely politically determined.

Globalization and the current crisis

It may be objected that this story of de-globalizing trends blatantly ignores the exposure to global forces shown in the current crisis, which Gordon Brown christened 'the first crisis of globalization'. But if that title is intended to suggest that the British economy is now much more vulnerable to shocks from outside it is a misnomer. First, note that the recession has come in two phases. Initially it was a private sector shock driven by financial breakdown. This, in time-honoured fashion, was offset to a significant extent by the large automatic stabilisers inherent in a 'welfare state'. The budget deficit grew in classic 'Keynesian' fashion to offset private sector deflationary forces (as well as in order to bail out the banks). As a result, the downturn was serious, but not disastrous - clearly less serious than 1920/22 or 1929/32. Second, we are now entering a public sector recession, brought about by the Coalition government's budget decisions. Are these decisions an unavoidable consequence of financial globalization? On this, we need, as always, to have a clear historical perspective. Governments that borrow money on international markets will be vulnerable to problems of confidence, of how to sustain the support of those international investors. There is nothing new here: in Britain, the great political dramas of 1931 and 1976 were precisely the consequence of the loss of such confidence. The evidence so far suggests that the current high (but not unprecedented) levels of public borrowing and debt are sustainable without any fear of a 'Greek-style' crisis. The state of British public finances puts them in the middle-range of OECD countries.

So the Coalition, like any other government, has been constrained by 'global finance' because it is a borrower. But those constraints are negotiable and have still left a considerable room for manoeuvre for the government, considerable room for it to pursue its own ideological and political priorities. To suggest global financial markets have straightforwardly dictated policy is very much exaggerated.

Conclusions

The arguments above suggest that public debate about globalization needs to recognise that since the Second World War the British economy has been subject to both globalizing and de-globalizing forces simultaneously, not sequentially. More than that, the argument is that the latter have in many ways been more important than the former. The clear implication is that the economic welfare of Britons is less directly reliant on 'global forces' than in the past. This suggests that we need to pay as much attention to the forces making for de-globalization as those working in the opposite direction. The contention is not, of course, that such de-globalization has arisen from a growing protectionism - the nightmare of liberal economists. Plainly, the broad trend in markets for goods and services (and capital, though not labour) has been towards liberalization and globalization. Rather, de-globalization has arisen in part as the unplanned consequence of changes in the structure of both demand and employment - broadly the transition to a 'service economy'. But is has also arisen from a deliberate but under analysed growth of state action.

Political scientists have put forward comparative evidence that the extent of globalization is correlated with a growth of public spending. The link is through economic security; as globalization threatens greater insecurity, so public sector growth is seen as diminishing that insecurity. Insightful as such analyses are, they focus too much attention on social security spending, and on national trends. Both these things matter, but in Britain even more striking is the growth of direct state employment, on a highly regionally and locally differentiated basis.

To explain this under-examined phenomenon we should probably start, as the political scientists have, with a focus on economic security (and domestic employment as, in a sense, a prior form of, or alternative to social security). The inventors of the post-war settlement were right to recognise the political importance of this. We should apply that point in seeking to understand how 'regional Keynesianism' has grown and flourished - facilitated by the de-globalizing structural changes identified above. Such an approach should help to give new perspectives on current debates. In relation to the current cuts in public spending, there is evidence that those in local government spending will fall disproportionately on the 'old staple' areas, with particularly serious consequences for employment and economic security. As a corollary, the current mantra accompanying public sector cuts on the need to expand the manufacturing sector needs to recognise the complex implications of such an expansion for economic security. Similarly, calls to 'open-up' the service sector to greater international competition in the name of efficiency also need to be evaluated against the issue of economic security. More broadly, we need to recognise that globalization is not a 'one-way street', but one dynamic at work alongside others. More attention to the dialectic of these other forces would be appropriate given their economic and political significance.


Further Reading


P. Hirst and G. Thompson, 'Globalization in one country? The peculiarities of the British', Economy and Society 29 (2000).

D. Rodrik, 'Why do more open economies have bigger governments?', Journal of Political Economy 106 (1998), pp. 997-1032.

J. Tomlinson, 'The deglobalisation of Dundee, c.1900-2000', Journal of Scottish Historical Studies 29 (2009), pp. 123-140.

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