Ifo Viewpoint No. 11: The Dilemma of Globalisation

Hans-Werner Sinn
Munich, 6 March 2000

For many globalisation is a threat, for others it is a potentially new step in the development of mankind. Both are right. Globalisation improves the trade in goods, the exchange of labour, and the cross-border flows of capital, from which all countries will benefit. A surge in growth can be expected which will enlarge the welfare of each country.

Within a country prosperity will only rise on average, though. There will be winners and losers. The winners will be wealth owners and the highly skilled in the developed world, and most of the workers in the lesser developed countries. Among the losers will be many - if not most - German less skilled blue and white collar workers, who will not be able to defend their internationally high wages or, if so, only at the cost of additional unemployment. The free trade of goods and the movement of capital and labour will increase the size of the cake available to all Germans, but ordinary workers will receive a smaller slice of it. A reduction in the growth rate of real wages is unavoidable.

Globalisation will cause considerable problems for the social welfare state. The rich, who must give the state more than they receive, find it easier to escape the system by emigration, and more and more poor, who are net recipients of government funds, will be put in the position of seeking out the state with the most generous welfare benefits. It is true that our social welfare state is in need of fundamental reform. But we cannot expect such reform to be induced by competition between states. Even a well-constructed social welfare state that encourages self-initiative (see Ifo Viewpoint 6) cannot prevail under such competition. Countries that must expect a cross-border migration of capital and people will endeavour to frighten off net recipients of government resources and to attract net payers, and this tends to dismantle the social welfare state, not merely to reform it.

This is the true dilemma of globalisation in Western industrial countries. The need for protection by the welfare state is increasing due to world-wide low-wage competition, and at the same time the competitive pressure on social welfare systems is reducing the ability to provide this protection. Wage and distribution policies cannot change this trend without exacerbating the problem. There is little scope for useful reactions. Workers must become even more productive in response to the growing wage competition and governments must get used to relinquishing power and control mechanisms. The improvement of research and education, investment wages and employee savings programs, as well as a transition to a partially funded social security system are among the few ways for individual states to cushion and mitigate the distribution effects. All countries together can take counter measures such as a limited harmonisation of taxes and the application of the home-country principle in welfare benefits (Ifo Viewpoint 9), but even these measures will not really be able to put a halt to the development. The underlying forces are simply too strong.

Hans-Werner Sinn
President of the Ifo Institute


Abridged translation of an article published in "Die Zeit", 2 March 2000, p 30.