David Moss, the John G. McLean Professor at Harvard Business School, believes discontent with globalization, heightened by grim economic conditions on Main Street, could potentially result in a protectionist backlash. “Could the economy within your lifetime or that of your children be far less global than it is today?” he asks rhetorically to a packed audience of executives attending a Harvard training program. “Yes it could. It could be dramatically less so.  Globalization has collapsed before, so we need to be attentive to the possibility.”

Frequently consulted by US lawmakers, Professor Moss is perhaps best known for When All Else Fails: Government as the Ultimate Risk Manager (Harvard University Press, 2002). Although the United States is famous for distrusting the state, his book shows how lawmakers actually played a pivotal role in fostering private markets from the earliest days of the Republic. In the process they transformed government into an insurer of last resort through public policies as diverse as limited liability and federal disaster relief. 

Now, in looking at the global economy, he believes the risk of protectionism may be growing. He is not alone. The Economist warned in February about countries responding to the crisis by closing their borders to trade: “Economic nationalism – the urge to keep jobs and capital at home – is both turning the economic crisis into a political one and threatening the world with depression.” Despite a few isolated protectionist incidents, such as the US-China tire spat, nations have remained committed to globalization. However, world trade has plunged and this is affecting the further integration of the movement of goods, capital and jobs. What is more, notes Professor Moss, the public has become suspicious of globalization.

In the United States, 63% think globalization is “bad” as it results in job losses and lower wages. More than 50% of people in France, Italy, Spain and the United Kingdom responded that it is having a negative effect on their countries.* This is a red flag to those who believe globalization is critical to global economic well being.

Professor Moss acknowledges that opposition has rational grounds. While international trade should increase specialization and productivity and stimulate growth, there is no guarantee that gains will be distributed equally. Professor Moss points to the United States and the Gini coefficient, a common measure of income inequality, as a reflection of the rising gap between rich and poor. In the United States, this has gone from 0.386 in 1968 to 0.466 in 2007. The United States now ranks in the company of Russia (0.399) and Ghana (0.48) in terms of inequality. Such a situation might be less worrisome, he suggests, if sufficient economic mobility still exists, or if income at the lowest levels increased each year. However, the real income of the bottom 40% of the US population has remained static since the 1980s, while the opportunities to live the American dream by escaping to another income bracket have been curtailed.

Is globalization to blame? “It doesn’t really matter what I or other economists think,” says Professor Moss. “It matters what the public thinks and that is unambiguous. A large part of the public blames globalization, and this growing hostility is finding its way into politics in the form of calls for immigration restriction and trade protection.” If protectionism takes hold the business environment could change quickly. An example occurred in the 1930s when the United States introduced the Smoot-Hawley Act that resulted in record tariffs on more than 20,000 imported goods. Other countries soon retaliated and international imports plummeted from three billion gold dollars to less than a billion in a few years.

To stop globalization from becoming a dirty word, Professor Moss argues that our understanding of it must be transformed. The conventional view is that in this time of rapid flows across borders, national governments have no choice but to shrink.

They need to shrink taxes, they need to shrink regulations and they need to shrink social provision. Why? Because, if they don’t the nation will not be competitive in the global economy.

“I suggest that this conventional view is wrong. In fact it is not only wrong, it is dangerous and may itself represent one of the greatest threats to globalization.” Moss says that cutting social costs to increase competitiveness can be counterproductive if carried too far. While it makes sense for government to defer to markets in the short term, markets depend on governments for law and order, for a level playing field, protection of private property, a secure money supply, and peace and social stability. Cut social costs too deeply and you risk damaging the very system on which the markets depend.

In a similar vein, Dani Rodrik, also from Harvard and author of Has Globalization Gone too Far, has argued that economic openness and government spending on social security go hand in hand. As societies expose themselves to the vagaries of the world market and therefore to more risk, the electorate demands more social protection. So, export-oriented economies such as Sweden, Germany, Austria and the Netherlands show a higher government spending than more closed economies such as the United States’ with a much lower share of trade to GDP.

To save and strengthen globalization, it is necessary that globalization is no longer perceived as a threat, responds Professor Moss to an audience question. This can be achieved by including it as an accepted piece of the social contract, much as US President Franklin D. Roosevelt did with the New Deal. “Think what you want about Roosevelt, but he was a political genius. In the midst of the Great Depression, he convinced the public to move toward freer trade. He did this by offering a Grand Bargain. In exchange for asking the public to accept greater exposure to international competition, he provided a reasonable degree of economic security and opportunity at home.”

Roosevelt never spoke about trade in isolation. He always linked it to peace, prosperity and economic security. It was a convincing deal that worked until the 1970s. “Giving up on that Grand Bargain is dangerous. We need to find a way to rebuild a beneficial bargain at home and abroad if we want to keep globalization going. This new social contract would extend beyond traditional forms of redistribution to include skills. We must work to improve education, make college more accessible, fix our primary and secondary schools and increase opportunities.”

In isolation, globalization is perceived as a negative. Presented as part of a broader social contract, it could take on a far more positive meaning. But is this realistic? “I have no crystal ball,” Moss explains. “But I am bullish in the longer term. There are a lot of reasons to be optimistic. The United States is enormously innovative and has an excellent record in fashioning effective responses, both public and private, in times of crisis.” Internationally, Moss believes, the global economy has huge promise, but we need to deal with some significant threats, including rising inequality, that could tear this promise apart. “Ultimately, if we don’t successfully deal with them, both global and domestic prosperity could hang in the balance. I’m optimistic, but we have to remain vigilant about preserving and strengthening our social system – we have to remain attentive to that Grand Bargain.”  

* Fortune Magazine poll conducted by telephone, 14–16 January 2008. “Globalisation backlash in rich nations,” The Financial Times, 22 July 2007.

Published by PROJECT M in November 2009

(Photo: BIWA/gallerystock)