Oct 3, 2018 in Economics

One of the most important topics in recent decades is the impact of globalization. Globalization can be traced back to medieval times when European superpowers had the wherewithal to travel across the seas and established commercial and political ties with nations as far as China, India, and Australia. The British Empire that boasted of its influence to have existed in both sides of the world is a prime example of this type of globalization as nations are connected through a common thread. But in the postwar period globalization has become more evident as the international economy exerted more pressure on the outcome of national policies. The four articles that will be examined in this study provide differing perspectives regarding the impact of globalization on the economy. But there is one thing in common between these four articles and this is examination of the relationship between globalization and welfare spending among nation states.

Globalization

            Before going any further it is important to point out that globalization is something that is not easy to define and study because it is not a static thing. There are different interpretations and different viewpoints regarding its origin and significance. One way to appreciate globalization is to see it from the perspective of technological advancements. It can be argued that this phenomenon was made possible by the rapid development of technology especially when it comes to telecommunication and cost-efficient transportation options. As a consequence of these technological breakthroughs, human beings and their respective governments are now able to interact, conduct businesses and exchange goods and services in the most efficient manner.

            It must also be made clear that a major condition for globalization is linked to Information Technology. It is not only physical objects and mass migrations that were the obvious consequences of globalization but also the exchange of ideas. More importantly, business information can be transmitted in a split-second. This development paved the way for the movement of funds from one continent to the next. It is now possible to invest and move currency from one country to the next and forever changed the way people and governments understand the meaning of international trade.

            Another important facet of globalization is Foreign Direct Investments wherein money pooled by institutional investors can be moved to emerging markets and industrialized economies in a continuous cycle that gave rise to the fears of insecurity.  Institutional investors are attracted to emerging markets because of three key features: a) it leads to socio-economic development and the entry of traditional nation states into the traditional international economy; b) it leads to the creation of new markets by new industries; and c) it leads to the creation of an emergent global business system (Choi, Hilton, & Millar, 2004, p.5).  The existence of emerging economies adds pressure to industrialized nations to perform better. Nevertheless, emerging economies can be easily destabilized by the movement of funds against their favour.

            The information given above provides a simplified version of globalization. It is important to point out that the behaviour market forces in the international and national levels can be traced back to other factors aside from the radical improvements in transportation and communication. In the review of related literature it was revealed that the condition of the post-World War II period had a significant impact on the global economy as much as globalization does. In social research it is important to consider all the variables. In the following analysis, the proponent of this study chose four related articles that discussed the relationship between globalization and the welfare state.

Overview of 4 Empirically-Based Articles

            As mentioned earlier globalization has different facets, like a diamond that can be viewed from different perspectives. It has been made clear that a simplified understanding of globalization will suffice to jumpstart the discussion on the impact of globalization and welfare states. The following analysis is simplified even further by the selection of articles that also considers the effect of factors that are present after the Second World War.

Four Hypotheses and Some Empirical Evidence

Researchers Paul Bowles and Barnet Wagman examined the impact of globalization on the welfare state through the careful scrutiny of four popular hypotheses linked to the relationship between the two contemporary phenomenons. Among the four hypotheses the most popular is the “downward harmonization hypothesis” (Bowles & Wagman, 1997, p.318). This particular hypothesis came about through the following argument:

The virtually instantaneous mobility of capital in unregulated markets seriously affects the capacity of governments to regulate national economies; competition for capital and markets increases pressure to adopt low wage strategy, including reduction in the cost of social benefits and weakening labor standards; and the twin goals of maintaining acceptable levels of employment and defending the principles of equity and solidarity seem increasingly compatible (Bowles & Wagman, 1997, p.318).

            With the first hypothesis presented by the duo, the impression is that globalization has created a negative effect on the state and its people. The simplest explanation to support this view is the so-called “impotence of national governments in the face of currency flight” (Bowles & Wagman, 1997, p.319). This assertion is supported by historical events such as the Mexican peso crisis of 1995. Another important piece of evidence used to support this view is the significant increase in foreign direct investment.

The authors had to make an assumption in order to prove this hypothesis and that immediately made a connection between the liberalization of capital markets and the lack of government control when it comes to matters that affect the welfare of the state. In other words external investors and the source of funds overseas dictate the actions that can be undertaken by the government.   It is clear that the researchers used historical data as well as commonly held beliefs regarding economic principles to try to prove the validity of the first hypothesis.

The second hypothesis is called the “upward convergence hypothesis” (Bowles & Wagman, 1997, p.322). In the first one the researchers used historical data like the movement of funds from one nation to the next by virtue of globalization but with the second hypothesis they tried to substantiate their claim using economic theories from noted philosophers like Karl Marx. At the same time they used research findings from other analysts who in turn used statistics to determine the correlation between size of government and trade openness (Bowles & Wagman, 1997, p.323).

The third hypothesis provides a different perspective when it comes to the relationship between welfare state spending levels and globalization. It is called the “convergence clubs hypothesis” and it does not agree with the previous two hypotheses when it comes to the uniform effect of globalization for all OECD countries: “One of the most powerful conclusions in comparative research is that political and institutional mechanisms of interests representation and political consensus building matter tremendously in terms of managing welfare, employment and growth objectives … countries vary in their capacity to manage conflicting interests” (Bowles & Wagman, 1997, p.324). There was not enough information given to support this view.

The fourth hypothesis is called the “globalization-irrelevance hypothesis” and as the name suggests that there is no significant implication when it comes to the relationship between globalization and the welfare state. The proponent of this paradigm argued that “Despite its growth during the post-Word War II period, there is still evidence that there are considerable barriers to the movement of long-term capital … it does not appear that we have moved to a Walrasian world where we have a pool of world savings with countries freely borrowing from it” (Bowles & Wagman, 1997, p.326). In this case, statistical data was both used to support and questioned the validity of a particular idea.

Globalization and the Welfare State: Constraints, Challenges and Vulnerabilities

Fritz Scharpf is a German professor, and he pointed out that the study on the relationship between globalization and welfare-state policy. It is an important consideration because welfare-state policy can directly affect the national economy. Scharpf made the assertion that it is not enough to interpret available data and interpret it with a bias towards the expected impact of globalization. At first glance it seems that effect of globalization can be predicted because of the anticipated outcome of certain features of globalization such as the eradication of trade barriers and the ease of movement of capital from one country to the next as facilitated by institutional investors (Choi & Millar, 2004). But Scharpf said that it is important to consider other variables as well especially when interpreting data take from the decades after the Second World War:

In the early postwar period of ‘embedded liberalism’, national economies had been only weakly coupled to their international environment and national governments were still able to control capital transfers, exchange rates, and the conditions under which goods and services could be imported and exported – which allowed them considerable freedom in shaping national systems of employment, taxation, regulation, and welfare provision (Scharpf, 2000, p.3).

Scharpf also said that even after international economic environment began to be evident, national governments were still able to dictate policy options (Scharpf, 2000, p.4). The author highlighted a few historical developments that could have easily impacted the national economies of the following respective countries as easily as globalization would have created the same effect. These events occurred in the decades of the 70s and 80s:

Britain, Sweden, Italy, Australia, New Zealand and other countries frequently attempted to restore international competitiveness through politically determined valuations of their currencies. Australia and New Zealand supported full employment by promoting import-substituting industrialization that was protected by extremely high tariff barriers and quantitative restrictions on imports. Austria, France and Italy did use a large range of nationalized industries as an employment buffer in the first oil-price crisis (Scharpf, 2000, p.4).

The most important thing to consider regarding Scharpf’s arguments is the impact not only of globalization but other factors as well. It has been made clear that national governments are not entirely powerless when confronted with the significant forces that emanated from Free Trade agreements as well as foreign direct investments. It is also important to point out other historical developments such as the effect of the oil crisis of the 70s and 80s. In other words Scharpf alerted researchers to a more nuanced view of history and other factors that can affect the economy and the behaviour of welfare state and not to merely link everything to globalization.

Globalization and the Welfare State

Geoffrey Garret and Deborah Mitchell asserted that they can disprove the popular notion regarding the impact of globalization on the welfare state. They started by pointing out the commonly used argument against the relationship between welfare state economy and globalization:

The welfare state is considered by many to be uncompetitive. There is no market for publicly provide services. Income transfer programs distort labour markets and bias intertemporal investment decisions. Moreover, government spending must be funded, often by borrowing in the short term and ultimately by higher taxes. Taxes on income and wealth directly erode the bottom lines of asset holders ... the competitiveness of national producers is decreased (Garret & Mitchell, 1999, p.6).

It is interesting to point out that Garret and Mitchell said that analysts and policy makers must not be pulled easily into a knee-jerk response when it comes to globalization especially if they are inundated with suggestions from the media and analysts that provide a superficial interpretation of facts. At the end of the paper, Garret and Mitchell concluded that with the data they posses they cannot assert with a great deal of certainty that “globalization has not induced a pervasive race to the bottom in welfare state regimes … nor have governments responded to market integration by increasing their welfare state effort across the board” (Garret & Mitchell, 1999, p.32). Thus, they concluded that in reality the economic behavior of a particular nation is somewhere between these two extremes (Garret & Mitchell, 1999, p.32). Clearly, a more refined research framework is needed to determine exactly the dynamics that occur in the interaction of globalization and creation of welfare state policies especially when it comes to welfare spending.

Globalization and Welfare: Which Causes Which?

Researchers Eunyoung Ha and George Tsebelis have a radical argument as compared to the studies examined recently. The other researchers were either non-committal when it comes to the negative impact of globalization while others argue that there are other factors involve in the creation of welfare state policies and that globalization does not have the capability to force national governments to choose only one option. Eunyoung Ha and George Tsebelis on the other hand went a step further and made the claim that globalization and welfare spending can be combined to achieve a “qualitative equilibrium” (Ha & Tsebelis, 2010, p.32).

These two researchers expounded on their claim by saying “liberal countries go to a lower level of globalization because they do not produce sufficient welfare programs to support a higher equilibrium like the corporatist countries” (Ha & Tsebelis, 2010, p.33). They supported their claim pointing out that prudent welfare spending can enhance globalization. In other words globalization does not force national governments to cut spending. However, this is only possible if policy makers are aware that welfare spending does not negatively affect globalization or the benefits that globalization brings such as foreign direct investments.

The Critique           

            The weakness and strengths of the four empirical studies mentioned earlier can be attributed to the imperfect system utilized by social researchers. For instance, it is difficult to begin any inquiry without making assumptions. In most cases, researchers have to choose a theoretical framework before they can initiate the process of research. Consider the following discussion regarding the problem of describing a particular phenomenon:

On closer examination, all description is both comparative and theory-lade because in describing we choose what to describe. No social situation or behaviour can be described exhaustively. We must always select from a potentially infinite wealth of possible observations, and in making them we implicitly compare what we see with something else (Bechhofer & Paterson, 2000, p.5).

            The researchers who wrote the four articles had to describe globalization and they have to begin somewhere but they knew that globalization encompasses several generations and different time periods. It is therefore important for them to focus on the postwar period and narrowed it even further to the decade of the 70s and 80s.

            The four articles immediately plunged into the collation of data or review of related literature without clarifying their worldview that could easily affect their analysis of data gathered (Buchanan & Bryman, 2009, p.39). Thus, it is possible to perpetuate beliefs based on unverified assumptions (Bryman & Burgess, 1994). The researchers were examining data from the worldview of a citizen of an industrialized economy. No one considered the meaning and significance of the data gathered if viewed from the perspective of an emerging economy or a Third World economy.

            Another important feature of research is the research design. The importance of which can be seen in the following statement: “The function of a research design is to ensure that the evidence obtained enables us to answer the initial questions as unambiguously as possible” (Becker & Bryman, 2005, p.36). It is easy to understand this assertion but when it comes to the answering the question regarding the link of globalization and welfare spending the challenge of creating an appropriate research design is tremendous.

            Revisiting the research design created by Bowles and Wagman reveals the challenge of convincing readers which hypothesis is more credible and can be validated based on available data. The problem lies in the research design that can provide enough information for something as complicated as globalization and welfare spending.

            The same problem is evident with other studies such as the one conducted by Garret and Mitchell as well as that of Scharpf. They needed to collate data regarding the economic behaviour of states that belong to the OECD. But apart from the difficulty of the requirement they also have to figure out the type of data that they can use to provide a credible analysis of the phenomenon under scrutiny. Thus, researchers are forced to simplify their research design. In the case of Scharpf, he compared the taxation and social security contributions among the different members of the OECD. There is nothing wrong with this approach but it can be an oversimplified analysis a complicated issue.

            Another major challenge is in the need to operationalise the key concepts in the research design (De Vaus, 2002, p.36). All the researchers encountered difficulties when it comes to the concept of globalization. Researchers Ha and Tsebelis made excellent work when they pointed out that analysts are easily swayed by commonly held beliefs regarding globalization and government spending that it is easy for them to automatically resort to the default definition and implications of these two forces when pitted against each other. They were correct in redefining the theoretical framework to view globalization and welfare spending. But the weakness of their research design is in their inability to clearly operationalise the concept of globalization. Thus, it is difficult to accept the findings of their study if they have a different understanding of globalization even if they use the same terms as other researchers.

            Although there are weaknesses in the research design a commendable feature of the articles is the acknowledgement made by the researchers for a need for a more refined research framework to learn more about the other aspects of globalization. However, not all the researchers took the time to rigidly examine their research design in order to account for errors in their respective study. It is important to distinguish error from fact (Gilbert & Mulkay, 1984). It is imperative for researchers to not only operationalise key concepts and value the importance of collecting accurate information, it is also important to distinguish weakness in the research design (Davidson & Layder, 1994). It is the mark of an effective researcher.  

Conclusion

            The four articles examined focused on globalization and its relationship with welfare spending. The four articles provided enough material to study the challenges faced by researchers when it comes to developing a research design that can answer a research question in the most unambiguous manner. The challenges can be found in choosing the correct theoretical framework, the operationalisation of key concepts, the accounting for error and an unbiased interpretation of data free from the influences of past knowledge and commonly held beliefs regarding a particular phenomenon.

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