Prachi Mishra: Don’t leave labour behind if globalization is to succeed
The conventional economic case for globalization and free trade has emphasized the aggregate gains that they bring, including enhanced productivity, faster technological change and wider consumer choice. However, a critical aspect often overlooked is that globalization inevitably creates both winners and losers in the short term, even though its long-term effects are broadly positive for society as a whole. The theoretical underpinning for these overall benefits is the assumption that losers can be compensated and moved over time to alternative productive sectors.
Yet, in practice, the benefits and costs of globalization have been unevenly distributed across worker demographics, industries and regions. This may point to inadequate implementation of supportive policies such as trade adjustment programmes, social protection measures, regional development initiatives and industrial schemes.
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Given these realities, the current social and political backlash against globalization—in the US and globally—should come as no surprise. This sentiment has become a decisive factor in one election after another. In response, policymakers increasingly adopt trade restrictions, even as concerns about ‘fragmentation’, ‘de-globalization’, ‘slowbalization’ and offshoring/friend-shoring strategies reach unprecedented levels.
Notably, the seeds were germinating well before the 2024 US election; its new administration just appears to be amplifying the existing patterns rather than creating them.
New research evaluates policy approaches that have either facilitated or hindered adjustment to globalization, trade shifts and technological change. Studying the ‘China shock’ (of rising imports from there) shows that on average, this economic shift led to a deterioration in labour market outcomes in manufacturing worldwide, as measured by higher job separation rates for prime-age males.
A notable revelation is that countries with stronger labour-market support mechanisms (such as Germany, Netherlands and Austria) saw smaller increases in job separation rates. These support mechanisms could include active labour market policies (ALMP) such as training programmes, skill development initiatives, employment subsidies, job creation and entrepreneurship support; or passive labour market policies (PLMP) that include unemployment insurance and benefits. Further, anti-trade sentiments are less sensitive to job displacement in countries with robust labour support systems.
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Similar findings emerge when examining major technological transitions, such as the shift from internal-combustion-engine to electric vehicles. Europe underwent a rapid transition to the latter in response to ambitious climate goals. Research indicates that European regions with higher spending on training and greater worker participation in such initiatives had smaller unemployment increases during this transition.
Yet, spending on labour market programmes is surprisingly low in most countries. Denmark, Sweden and Netherlands lead in spending on ALMPs, allocating about 0.75-1.5% of GDP. The median spending globally is merely 0.3% of GDP, and 90% of countries spend less than 0.7% of GDP. If we include passive interventions such as unemployment benefits, the global average is 0.9% of GDP. Denmark, Israel, France and Spain lead in combined spending with 2.5-3% of GDP.
Emerging markets typify this under-investment, with annual spending likely in the bottom percentile of the global distribution. India’s spending, for example, is primarily focused on active schemes rather than passive unemployment insurance, with its rural employment guarantee accounting for a significant portion of the total spending, currently at 0.2% of GDP.
Other active programmes such as for skill development, rural youth skilling and micro-enterprise creation have even smaller allocations. Though data on PLMPs is hard to find, these include Employees’ State Insurance and the Atal Beemit Vyakti Kalyan Yojana; these are probably minuscule in terms of spending. As over 90% of jobs in India are informal and lack social security benefits, workers have minimal support in-between jobs and for reskilling to facilitate their transition across sectors.
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The political sustainability of globalization—and even sector-specific industrial policies—requires managing resistance to change and lowering transition costs. There is an urgent need for effective labour market programmes to help reduce these costs.
Without robust compensatory measures, the backlash against globalization will intensify, regardless of which political parties hold power. The fundamental question is not whether globalization can generate aggregate economic benefits, but whether society can implement the policies necessary to ensure these benefits are equitably distributed. This challenge is particularly formidable for populous nations with substantial informal employment. As Nobel Laureate Joseph Stiglitz observed in Globalization and its Discontents, “The problem is not with globalization itself but with how it has been managed.” The path forward requires not abandoning global economic integration, but repurposing its governance to promote inclusive prosperity.
This article draws on ongoing research titled ‘Policies to Facilitate Adjustment to Globalization’ by the author along with Lorenzo Rotunno, Michele Ruta, Petia Topalova and Robert Zymek.
These are the author’s personal views.
The author is professor of economics at Ashoka University and head of Ashoka Isaac Centre for Public Policy.
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