Economic research shows that globalisation is good for the economy as a whole in a country, but this conclusion is based upon a number of often un-stated assumptions. To be profitable for society as a whole a structural transformation of the economy is needed and this process always produces winners and losers; the conclusion that globalisation is good for all is theoretical only.
In general, absolute income levels for all will rise with increasing globalisation, but the relative increase for the owners of capital will be much higher than for ordinary income earners. Empirical research has shown that the effects of globalisation on the distribution of incomes within countries will increase in relative terms – the rich will become much richer, while the poor will be just a little less poor.
If the profits from globalisation are distributed unevenly a backlash in the form of protectionism is to be expected. The profits from globalisation will be taxed higher and domestic production will be protected. We should not then take globalisation and its benefits for granted since its effects can easily be distorted by voter opinion and political decision.
Most of the results discussed in the report Globalisering och inkomstfördelning are valid not only for Sweden but for each of the Nordic Countries. Two aspects are not however discussed in the report namely, the wage structure and how to benefit from globalisation. These aspects go to the heart of the welfare systems in the Nordic countries.
The wage structure in the Nordic countries is compressed, particularly as compared to the 'Anglo-Saxon' economies since it is believed that broad income differentials are unjust and promote inequality. Countering inequality has of course been the professed political goal of the Social Democratic movements in the Nordic countries throughout the post-war era. This political vision has had a significant impact on the effects of globalisation on Nordic income distribution levels.
Wage levels for poorly educated and minimally-productive labour are, in the Nordic countries, among the highest in the world. Globalisation means that these groups will be the most obvious potential losers if production is out-sourced to low cost countries; a cry for protectionism and economic compensation is then to be expected from this voter group and its political representatives. This is not however the only threat to globalisation in the Nordic countries.
Well-educated specialists have lower wages in the Nordic countries than in the rest of the OECD; their salaries have been deliberately compressed for the sake of a political vision. In a globalised world however labour is mobile. If this kind of wage policy is not reconsidered in the Nordic countries a segment of the well educated labour force will undoubtedly seek to move to gain the proper (global) market rate for their labour.
Globalisation will lead to the protectionism of those production structures unable to adjust to the international pressure for transformation. The labour force and the production structure have to adjust and adapt to the new economic structure – the post-industrial economy led by the service sector.
Income differences can be seen as an incentive to adjustment. This is not however in accordance with the dictates of the "Nordic model". The change away from the 'Nordic Welfare system' actually involves the fundamental breakdown of the political consensus over the acceptance of 'high' taxation levels on ordinary incomes. There will be a greater 'social cost' bill to pay and less 'high earners' to pay it. This is a situation the 'Nordic Welfare system' cannot deal with.
During the two previous periods of globalisation (1860-1914 and 1944-1971) the Nordic countries performed well and took advantage of the opportunities that arose. The relatively well-educated level of the workforce does not explain why the Nordic countries did well during the first globalisation wave; capital inflows and trade explain this better. Emigration and a high level of productivity are the two single factors explaining most how Denmark, Norway and Sweden managed to profit from the first globalisation wave.
Nordic success during the second globalisation wave can be ascribed to trade and a high productivity; the role of migration is however unclear.
Emigration caused a relative labour shortage which had to be compensated for through increased productivity. In retrospect, the productivity increase more than compensated for this, which led to the Nordic success story of the first globalisation wave.
It is interesting, but perhaps surprising, to note that politicians and political economists advocate policy measures which have not, historically, had any impact on Nordic success related to globalisation. Immigration and education are good examples here.
By Daniel Rauhut. prevoius Senior Research Fellow at Nordregio
Globalisation
The Nordic Council of ministers is currently focusing on Globalisation and its implication for the Nordic countries. Journal of Nordregio covered the theme in No. 1/2008 including the article "The Three Waves of Globalisation" by Anders Johnsson.