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The welfare state and globalisation are compatible
 / [Alfred Pfaller] - [Electronic ed.] - Bonn, 2001 - [2] Bl. =3D 22 KB, Te=
xt
. - (Policy information / International Policy Analysis Unit ; 2001,1)
&lt;br&gt;Electronic ed.: Bonn : FES Library, 2001
&lt;br&gt;&lt;br&gt;&lt;font size=3D-1&gt;&lt;i&gt;=A9 Friedrich-Ebert-Stif=
tung&lt;/i&gt;&lt;/font&gt;
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<!-- END BEGIN1 -->
The welfare state and globalisation are compatible
 / [Alfred Pfaller] - [Electronic ed.] - Bonn, 2001 - [2] Bl. =3D 22 KB, Te=
xt
. - (Policy information / International Policy Analysis Unit ; 2001,1)
<br>Electronic ed.: Bonn : FES Library, 2001
<br><br><font size=3D"-1"><i>=A9 Friedrich-Ebert-Stiftung</i></font>


<p align=3D"center"><br><br><i>Text also available in <a href=3D"https://li=
brary.fes.de/fulltext/id/00891.htm">German language</a></i>
</p></font><p><font size=3D"+1"><br><br>
<!-- START BEGIN2 -->
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<br><br>
</p><center><img src=3D"https://library.fes.de/images/digbib/e_inhalt.gif" =
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<!-- END BEGIN2 -->

<p>
</p><ul>
	<li><a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E1">	Uncompe=
titive, because too costly?</a>
	</li><li><a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E2">	Hi=
gh productivity does not protect against undercutting</a>
	</li><li><a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E3">	Ev=
en structural adjustment ultimately provides no protection</a>
	</li><li><a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E4">	Th=
e key point:	social protection is possible at any wage and productivity lev=
el</a>
	</li><li><a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E5">	Th=
e welfare state can be made =84globalisation-proof"</a>
	</li><li><a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E6">	Th=
e welfare state and full employment</a>
	</li><li><a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E7">	Ne=
vertheless, globalisation does make life more difficult for the welfare sta=
te</a>
</li></ul>
<br><br>
<p align=3D"CENTER"><a href=3D"https://library.fes.de/fulltext/id/01046.htm=
#I0"><img src=3D"https://library.fes.de/images/digbib/e_oben.gif" width=3D"=
101" height=3D"15" border=3D"0" alt=3D"Page Top"></a>

<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E2"><img src=3D"h=
ttps://library.fes.de/images/digbib/e_next.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Next Item"></a>

<a name=3D"E9E1"></a><br><br></p><p align=3D"left"><font size=3D"+1"> Uncom=
petitive, because too costly?</font><br><br>
</p><p>=20
</p><p>=84The welfare state as we know it can no longer be maintained in th=
e age of globalisation." This argument meets with wide acceptance today, by=
 some with regret, by others with undisguised satisfaction. The argument re=
fers to the pressure on costs deriving from heightened international compet=
ition. The welfare state, it is claimed/as-sumed/feared, makes labour so ex=
pensive that the relevant products or the relevant production location cann=
ot survive in international competition in the longer term. Other places, s=
o the argument goes,  are already producing at lower costs, or else countri=
es are increasingly trying to undercut one another in the battle for market=
 shares. The locations with the lower welfare costs set the standard which =
the others will have to adapt to sooner or later.=20
</p><p>If one accepts this line of argument, it follows that countries have=
 two options.=20
</p><ul>
   <p></p><li>They give way to the pressure of competition, cut the costs o=
f the welfare state and thus safeguard the competitiveness of the national =
labour force on the internationally disputed markets. The upshot: lower soc=
ial security.
   <p></p></li><li>They do not give way. As a consequence, many jobs are lo=
st, simply because they are no longer competitive. Companies which keep the=
ir production facilities in the country offset this by rationalising jobs a=
way wherever they can. The upshot: increasing unemployment causing in turn =
the erosion of the welfare state.
</li></ul>
<p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E1"><img src=3D"h=
ttps://library.fes.de/images/digbib/e_prev.gif" width=3D"105" height=3D"15"=
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<a href=3D"https://library.fes.de/fulltext/id/01046.htm#I0"><img src=3D"htt=
ps://library.fes.de/images/digbib/e_oben.gif" width=3D"101" height=3D"15" b=
order=3D"0" alt=3D"Page Top"></a>

<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E3"><img src=3D"h=
ttps://library.fes.de/images/digbib/e_next.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Next Item"></a>

<a name=3D"E9E2"></a><br><br></p><p align=3D"left"><font size=3D"+1"> High =
productivity does not protect against undercutting</font><br><br>
</p><p>Welfare state supporters in high-wage countries often use the follow=
ing argument to counter this: we shall offset the high costs by high produc=
tivity and high product quality. We are able to do this because of our high=
 level of training, our sophisticated infrastructure, our high density of p=
roduction (which creates =84economies of scope"), our responsible trade uni=
ons, our relatively peaceful industrial relations (a consequence of our hig=
hly developed welfare state) and our more than hundred-years old =84culture=
 of productivity". Developing countries cannot compete with these advantage=
s, but have to offset them with low wages, low real estate prices, low envi=
ronmental standards, etc.
</p><p>It is true that all this has in the past made possible high wages (a=
nd non-wage labour costs) in the countries of the =84North", even though th=
ey were facing international competition. But, among other things, =84globa=
lisation" means that such advantages spread geographically, maybe not every=
where, but nevertheless to many regions with a massive labour surplus. A ma=
jor reason for this is the increasing possibility for companies to organise=
 manufacturing and distribution across national borders (=84transnationally=
"). When they shift production to a different location, they also transfer =
their manufacturing expertise and management skills. The upshot: the previo=
us production advantage no longer protects the =84Northern" high-wage count=
ries as much as it once did. The statistics may nonetheless keep attributin=
g to them a productivity lead because large numbers of their low-productivi=
ty jobs are shed and only the highly productive ones are left.=20
</p><p>The extent to which globalisation has already advanced in terms of h=
eightened competition between different locations can be regarded as an ope=
n question. There are some indications that the situation is not yet all th=
at dramatic. But the trend towards greater competition on costs (or even ju=
st towards a greater ability to black-mail the employees) cannot be categor=
ically denied.
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E2"><img src=3D"h=
ttps://library.fes.de/images/digbib/e_prev.gif" width=3D"105" height=3D"15"=
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<a href=3D"https://library.fes.de/fulltext/id/01046.htm#I0"><img src=3D"htt=
ps://library.fes.de/images/digbib/e_oben.gif" width=3D"101" height=3D"15" b=
order=3D"0" alt=3D"Page Top"></a>

<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E4"><img src=3D"h=
ttps://library.fes.de/images/digbib/e_next.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Next Item"></a>

<a name=3D"E9E3"></a><br><br></p><p align=3D"left"><font size=3D"+1"> Even =
structural adjustment ultimately provides no protection</font><br><br>
</p><p>A further argument which plays down the dangers of globalisation ref=
ers to the changes in production structures which have always resulted from=
 changes in the international division of labour: the =84North" hands over =
a few lines of production to low-cost =84Southern" competitors and concentr=
ates on those activities in which the latter =96 despite globalisation =96 =
cannot compete (high-tech, skills-intensive production and services).
</p><p>But this =96 per se correct =96 point does not devalue the argument =
about cost pressures, for two reasons:=20
</p><ul>
   <p></p><li>The high productivity sectors intended as escape routes may p=
rove to be too small to absorb displaced =84Northern" workers on a sufficie=
nt scale. All the industrial countries are moving into these sectors and jo=
stling for position. High-tech plus local services (education, health, lega=
l advice, administration, etc.) may be an option for the Greater London are=
a, but not for the whole of Britain and certainly not for the whole of west=
ern Europe. So low-wage competition can very much represent a threat to par=
ts of the workforce in high-wage countries.
   <p></p></li><li>Structural adjustment does not offer protection against =
competition amongst the high-wage countries to undercut one another.=20
</li></ul>
<p>=20
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E3"><img src=3D"h=
ttps://library.fes.de/images/digbib/e_prev.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Previous Item"></a>
<a href=3D"https://library.fes.de/fulltext/id/01046.htm#I0"><img src=3D"htt=
ps://library.fes.de/images/digbib/e_oben.gif" width=3D"101" height=3D"15" b=
order=3D"0" alt=3D"Page Top"></a>

<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E5"><img src=3D"h=
ttps://library.fes.de/images/digbib/e_next.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Next Item"></a>

<a name=3D"E9E4"></a><br><br></p><p align=3D"left"><font size=3D"+1"> The k=
ey point:
<br> social protection is possible at any wage and productivity level</font=
><br><br>
</p><p>=20
</p><p>=20
</p><p>Gross labour costs can only be as high as the market for goods and s=
ervices allows. If foreign competition puts pressure on labour costs, then =
adjustment must occur in some form. That may be via the exchange rate. But =
it may also be that gross wages have to stagnate or even fall for a period =
in some areas.=20
</p><p>However, the welfare state has nothing to do with the absolute wage =
level, and everything to do with the distribution of the gross national pro=
duct (or more correctly, the total wage sum permitted by the market) betwee=
n three components:
</p><ul>
   <p></p><li>direct consumption
   <p></p></li><li>provision for old age, illness, etc.=20
   <p></p></li><li>solidarity with those on lower incomes.
</li></ul>
<p>The proportions allocated to provision for oneself and solidarity with o=
thers go into the welfare state, with provision for oneself accounting for =
the lion=92s share. The proportion to be diverted for this purpose is a <u>=
political</u> decision, not one dictated by the market. In principle, high =
proportions for provision and solidarity can even be diverted from low inco=
mes. But correspondingly little will then be left over for direct individua=
l consumption.=20
</p><p>=20
</p><p><b> </b>
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E4"><img src=3D"h=
ttps://library.fes.de/images/digbib/e_prev.gif" width=3D"105" height=3D"15"=
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<a href=3D"https://library.fes.de/fulltext/id/01046.htm#I0"><img src=3D"htt=
ps://library.fes.de/images/digbib/e_oben.gif" width=3D"101" height=3D"15" b=
order=3D"0" alt=3D"Page Top"></a>

<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E6"><img src=3D"h=
ttps://library.fes.de/images/digbib/e_next.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Next Item"></a>

<a name=3D"E9E5"></a><br><br></p><p align=3D"left"><font size=3D"+1"> The w=
elfare state can be made =84globalisation-proof"</font><br><br>
</p><p>=20
</p><p>=20
</p><p>There are various mechanisms whereby the gross wage permitted by the=
 world market is distributed amongst the various uses. In many continental =
European countries (Germany, France, Italy, Belgium, Austria and others) th=
e most important mechanism is that of wage-related social security contribu=
tions which are shared by employers and employees. The demands made on the =
money allocated to these contributions derive from the needs of the various=
 social security systems (pension, health insurance, unemployment insurance=
). The key factors defining these needs are
</p><ul>
   <p></p><li>the development of the age composition of the population,=20
   <p></p></li><li>the cost trends in the health sector,=20
   <p></p></li><li>the development on the labour market.
</li></ul>
<p>For the process of wage-setting, these are independent variables. If the=
y are not to be questioned (so that no-one has to be ill just because he/sh=
e earns little, or so that no-one has to suffer a drastic cut in his/her st=
andard of living in old age), there is only one sensible conclusion: the wa=
ge available for direct consumption should be treated as a residual figure.=
 The amount to be negotiated between employers and organised labour should =
be the =84total hourly wage", and not merely that arbitrary sub-set which i=
s called the =84gross wage" in some countries (e.g. Germany). The =84total =
hourly wage" derives from
</p><ul>
   <p></p><li>the competitive situation on the product markets (=84globalis=
ation" may play a role here),
   <p></p></li><li>and the bargaining power of labour, which has much to do=
 with the scarcity of manpower.
</li></ul>
<p>Once the - individual and collective - preferences with regard to the pr=
ovisions to be made for the various risks of life and the degree of solidar=
ity to be afforded for the less well-to-do (as well as with regard to leisu=
re and the freedom from excessive mobility) have been taken into considerat=
ion, a net wage is left over. It would have to be adjusted to the changing =
=84needs" of the social security systems.=20
</p><p>However, in reality net wages are mostly not adjusted but defended. =
If at the same time social security costs are expanding (e.g. because of ad=
verse demographics), competitiveness might indeed be affected. Of course, i=
n the individual case, the claim of =84excessive" labour costs may just be =
part of the usual battle noise accompanying wage negotiations. But the poin=
t here is that in the bargaining process labour loses sight of the =96 esse=
ntially political =96 decision about the <u>distribution</u> of the total w=
age and that it perceives social-security contributions as being not part o=
f the wage. Employers also view them as =84non-wage" labour costs. When the=
 conflict over labour costs heightens, it is primarily the expanding =84non=
-wage" part which is seen as endangering competitiveness. The =84welfare st=
ate versus global market" battlelines are drawn. Yet the real problem is th=
e rigidity of the net wages in the face of =96 largely unavoidable =96 risi=
ng welfare costs.=20
</p><p>A system which uses general taxation to pay for provision and solida=
rity, as the Danish one, is more resilient in the face of globalisation. He=
re, the basic decisions on distribution between consumption, provision and =
solidarity are clearly taken politically. The costs for provision and solid=
arity are explicitly deducted from the incomes of the individuals. Since, i=
n view of international competition, companies can be taxed only to a certa=
in extent, increases in the funding needs of the social security systems ty=
pically have to be financed by taxes on household incomes or on  consumptio=
n (value-added tax, energy tax, etc.).
</p><p>Another way to immunise the welfare state against globalisation is t=
o essentially privatise provision for the risks of life and to leave only s=
olidarity to be organised by the state. This is most clearly possible with =
regard to old-age pensions (the largest single position of the total welfar=
e-state bill), because here the level of benefits depends, to a very large =
extent, on the amount of the contributions paid into the system. Privatisat=
ion, therefore, will not diminish social protection. But it will defuse the=
 conflict over =84non-wage" labour costs. The Swiss pension system shows ho=
w private provision can be combined with welfare-state solidarity. There th=
e elderly are protected against poverty by an egalitarian basic pension, wh=
ich is contributed to by all citizens (not only employees). But keeping up =
one=92s standard of living after retirement requires a private top-up insur=
ance.=20
</p><p>The demographic transition makes provision for old-age income - rega=
rdless of the pension system - ever more expensive and thus reduces the inc=
ome available for immediate consumption. Therefore it would be especially i=
mportant to stay clear of the competitiveness issue. Ultimately, pensions a=
re not at risk as long as people opt to make provision. But the unnecessary=
 competitiveness debate puts at risk the solidarity dimension of the welfar=
e state, i.e. the implicit and explicit subsidies to families and to those =
on low income (important e.g. in public health insurance).=20
</p><p>=84Immunising" social benefits against the pressure of competition p=
oses no problem in economic terms. But in quasi-corporatist states like Ger=
many it is very difficult to alter existing institutions, since every entit=
lement, no matter how petty, tends to be defended. In political terms, ther=
efore, this type of welfare state remains susceptible to pressures from glo=
balisation.=20
</p><p>=20
</p><p><b> </b>
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E5"><img src=3D"h=
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<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E7"><img src=3D"h=
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<a name=3D"E9E6"></a><br><br></p><p align=3D"left"><font size=3D"+1"> The w=
elfare state and full employment</font><br><br>
</p><p>=20
</p><p>=20
</p><p>So far, however, the pressure on the continental European welfare st=
ates has come less from globalisation than from mass unemployment. This for=
m of the welfare state is mainly funded by contributions linked to regular =
employment contracts. Thus, it relies more on full employment than other fo=
rms of the welfare state. Mass unemployment deprives it of people paying in=
 and increases its outgoings.=20
</p><p>Mass unemployment is not a result of globalisation. It is the effect=
 of 25 years of sluggish economic growth combined with a failure to adapt t=
he labour markets to this central condition.=20
</p><p>When reflecting on how to safeguard the welfare state, one should th=
erefore focus on:=20
</p><ul>
   <p></p><li>adapting the labour market to sluggish economic growth, or
   <p></p></li><li>=20
   <p></p></li><li>regaining high growth rates, and, of course,=20
   <p></p></li><li>adapting the supply of manpower to the changed <u>struct=
ure</u> of demand.
</li></ul>
<p>These are questions which involve a separate discussion. But, to begin w=
ith at least, globalisation is a secondary problem here which tends to dist=
ract attention from the real questions.
</p><p>Once again, the key factor blocking a socially acceptable adaptation=
 of the labour market is political in nature.=20
</p><p align=3D"CENTER">
<a href=3D"https://library.fes.de/fulltext/id/01046.htm#E9E6"><img src=3D"h=
ttps://library.fes.de/images/digbib/e_prev.gif" width=3D"105" height=3D"15"=
 border=3D"0" alt=3D"Previous Item"></a>
<a href=3D"https://library.fes.de/fulltext/id/01046.htm#I0"><img src=3D"htt=
ps://library.fes.de/images/digbib/e_oben.gif" width=3D"101" height=3D"15" b=
order=3D"0" alt=3D"Page Top"></a>

<a name=3D"E9E7"></a><br><br></p><p align=3D"left"><font size=3D"+1"> Never=
theless, globalisation does make life more difficult for the welfare state<=
/font><br><br>
</p><p>A =84globalisation-proof" welfare state is feasible. But it requires=
 a big political effort the success of which is not a priori guaranteed. St=
ill, globalisation does create a less favourable economic environment.
</p><p><b><u>1. Increased mobility of capital, coupled with increased mobil=
ity of highly skilled labour, results in a redistribution of the tax burden=
.</u></b>
</p><p>The consequence is greater injustice, but for the foreseeable future=
 no lack of funding for the welfare state. Even in the past, the welfare st=
ate has not tended to be a mechanism for redistribution from capital to lab=
our or from the rich to the poor. In simplified terms, it was always a mass=
ive redistribution machine within the working class. The people who funded =
it were always those who benefited most from it.=20
</p><p>Besides, several countries grant =84tax gifts" to various groups of =
high earners, without there being an economic necessity for such privileges=
.=20
</p><p><b><u>2. Insufficiently regulated capital markets are endangering ec=
onomic growth and thus making it more difficult to maintain existing welfar=
e state schemes.</u></b>
</p><ul>
   <p></p><li>Overshoots in exchange movements keep harming the competitive=
ness of countries or induce them to keep interest rates high, which in turn=
 impairs economic growth.=20
   <p></p></li><li>Repeated financial crises in individual countries or gro=
ups of countries result in a decline in demand which is felt around the wor=
ld.
</li></ul>
<p>As a consequence, the maintenance of the welfare state principle (approp=
riate parti-cipation of all citizens in national prosperity) is rendered mo=
re difficult, because:
</p><ul>
   <p></p><li>unemployment tends to be higher (the consequence: higher clai=
ms on the welfare state, lower contributions, the threat of poverty for the=
 long-term unemployed and for workers with a low scarcity value on the labo=
ur market);
   <p></p></li><li>in the battle for shares of stagnating or even shrinking=
 markets, an international race to undercut is fostered and the political w=
ill to maintain a just society is weakened.
</li></ul>
<p>=20
</p><p><i> Alfred Pfaller</i>
</p><p>Friedrich Ebert Foundation, 53170 Bonn, fax: +49 / 228 / 883 625, e-=
mail: PfallerA@fes.de
<!-- START END -->
</p><hr>
<font size=3D"-2">
=A9 <a href=3D"mailto:wwwadm@www.fes.de">Friedrich Ebert Stiftung</a>
| <a href=3D"https://library.fes.de/fulltext/id/support.html">technical sup=
port</a> | net edition=20
<a href=3D"mailto:walter.wimmer@fes.de">fes-library</a> | Juni 2001
</font></td></tr></tbody></table>
<!-- END END -->

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