Introduction

"Government's last gasp?", "the end of the nation- state", "the end of geography". Increasingly over the last few years the challenge of globalization has been much discussed in academic, policy, business and wider public circles. In the globalized world states, people and economies are emphatically i nterdependent. Perhaps most saliently, economic policy-makers are constrained by global financial markets, international investors and the policy decisions of the most powerful states. For Britain interdependence is particularly acute given the small si ze of its economy relative to the United States, Japan and Germany and its openness to international trade. Whether painted as a threat - the developing countries are stealing our jobs and the financial markets are eroding our sovereignty - or a promise - global markets offer boundless efficiency and choice - globalization is too often presented as a juggernaut which cannot be stopped, leaving politicians as bystanders. For many, Labour will return to office to find only that government no longer brings the power to achieve its ambitions. This discussion group was born out of a concern that the globalization debate has simplified what remains a complicated economic and political world.After years in which Labour deluded itself that it could achi eve everything by the sheer force of its political will, the party is now in danger of believing that it can do nothing at all in economic policy terms. Of course, there are, as there always have been, international constraints on what a Labour governmen t will be able to do, but there is no reason why these should stop Labour achieving substantial reform. In short there is nothing to stop the next Labour government running a sensible macro-economic policy, working to improve Britain's industrial perform ance and trying to reduce growing inequality.

In our discussions we have considered in detail the impact of the processes of globalization, particularly in terms of the policy constraints it imposes, and policy options it leaves open to a British go vernment - hopefully an incoming Labour government. This paper is a synthesis of our discussions to date and draws upon previous short papers written by members of the theme group. Such discussions and resultant disagreements have been useful and provided some interesting insights. However, this paper is written by a single author and so should not be taken to represent the views of all the participants; neither does it represent the views of the author.

The paper is organized around the myths and real ities of globalization, policy constraints and policy options. These questions are considered in relation to macro-economic policy, competitiveness, and income distribution and social policy. In the final section we briefly consider possible multilateral strategies for dealing with the international constraints under which governments around the world operate.

Globalization and macro-economic policy

A common story about the impact of processes of globalization on British macro-economic p olicy is that globalization has made governments powerless in the face of massive uncontrollable financial flows. Such a view has been reinforced by events such as the stock market crash of 1987 and the embarrassing exit of the pound from the European ex change rate mechanism in 1992. The story of powerless government takes various forms but we can highlight three common myths.

¥ Myth 1: globalization means that governments must adopt monetarist policies, focusing on low inflation rather than high emp loyment as a policy goal.

¥ Myth 2: globalization and increased capital mobility means that governments must offer potential investors a low tax and a low public-spending environment in which to operate.

¥ Myth 3: globalization and increased econom ic competition from low-wage developing countries mean that governments must confine themselves to pursuing policies around skills, training, low labour costs and low public spending.

To some extent these myths provide a healthy corrective to previous illusions that governments could pursue economic policies at will. Crucially, governments have a great capacity to mess things up through ill-advised macro-economic policies. We see this in the Tory record, with the recessions of the early 1980s and th e early 1990s, resulting from the loss of control in the Lawson boom. Failures of macro-economic policy also weakened the two past Labour governments.

Nonetheless, macro-economic and micro-economic policies can still be used for beneficial purposes. First, it is a fundamental error to see any deterministic relationship between globalisation and current economic policy options. In the short to medium term governments, even of medium sized economies, can sometimes pursue autonomous interest rate pol icies based on domestic considerations without risking currency depreciation. The problem with such policies is that they are likely to cause a deterioration in the long-term government bond market and will always be vulnerable to a change in the inher ently unpredictable sentiment of the foreign exchange markets. In the same context , devaluation is not in itself ruled out. In some circumstances, as Britain found after September 1992, it can be a stimulus to export led growth, but in many circumsta nces it will be a bad bet in a import dependent economy and where subsequent wage increases offset the immediate gain in competitiveness.

Second, globalization does not rule out tax increases or higher levels of public expenditure per se. While it is true that the top rate of income tax and corporation tax are constrained to some extent by those levels prevailing in other states, the financial markets do not react negatively towards each and every tax increase. Within these parameters market s are far more concerned about the gap between spending and revenue than the absolute levels of either. Unsustainable borrowing is not a practical policy option, but this still allows governments considerable fiscal discretion.

Third, governments can pursue policy measures aimed at long run supply side performance. such as best practice bench-marking of corporate performance, developed in partnership with business, careful reform of the welfare system to reduce the benefits trap at the bottom end, inv estment in skills and training, and the expansion of educational opportunities.

Fourth, within the framework of the EU governments can work to increase international economic co-operation and co-ordination. As the G7 and the G3 have shown on occasion, states whose central banks work together can still impose their relative preferences on the foreign exchange markets Whatever some of the likely problems with the European single currency, it will eliminate damaging currency speculation between parti cipating states most of whom conduct a large proportion of their trade within the EU itself. At the same time it will probably put the EU states in a stronger position to bargain with the United States over dollar policy.

Globalization and compe titiveness

A common story about the impact of processes of globalization on British competitiveness and industrial policy suggests that to be successful the British economy must offer a flexible environment - read low-wages and minimal workersÕ rig hts - for investors. This is an argument commonly deployed against a minimum wage and the recent EU Directive on the 48-hour working week. In this story, if Britain is to compete with the newly industrializing countries of South-East Asia and their larg er neighbours - India and China - we must make labour flexibility our goal.

Although some members of the group regarded international economic competition of this sort as nothing new and nothing to worry about, others felt that increasing competition f rom countries such as India and China - whose people number a third of the worldÕs population - does change the picture of competition significantly. If Britain is to compete in terms of cost with these countries there will be an inevitable erosion of Bri tish wages and working conditions. Although the theory of comparative advantage may hold, such that a country will always maintain a comparative advantage - it must be relatively better at producing either textiles or computers even if it is worse at bot h compared with a competing country - in practice it may be the competitive advantage of firms within a country that matters rather than an increasingly meaningless notion of a countryÕs comparative advantage. Processes of globalization have muddied the e quation of national competitiveness with corporate competitiveness.

Generally, discussions of international competitiveness employ two distinct meanings. First, international competitiveness as ability to sell - the competitiveness of British exports o n world markets. Second, international competitiveness as the locational attractiveness of Britain to foreign direct investment (FDI). In the first meaning competitiveness depends upon the cost structure of British industries (including relative-unit-labo ur-costs, RULC), productivity levels and exchange rates. In the second meaning competitiveness depends upon the institutional structures governing inward investment, labour markets, wage-bargaining and working conditions. If we look at the international ability-to-sell competitiveness of Britain in the period since WWII we see a steady nominal improvement, with the exception of a marked downturn from 1979-81 as the British economy suffered the initial ravages of deindustrialization, industrial unrest, an d the consequences of an unrealistic exchange rate. From 1981 onwards nominal British ability-to-sell competitiveness returned to a trend of steady improvement, mainly due to devaluations and increased labour productivity. Interestingly, the trends in Ja pan and Germany have been more or less the opposite. Japan and Germany have been losing nominal competitiveness in RULC terms almost over the entire period since the 1960s. Yet significantly, as Kaldor first noted in the 1970s, as the US and Britain were improving their nominal international competitiveness, they were losing out on their trade accounts, and while Japan and Germany were losing their nominal international competitiveness, they were improving or maintaining their trade account surplus es. This suggests both that quality matters as well as cost-competitiveness and that for Japan and Germany their real exchange rate has risen because of their success in non-price competitiveness. In itself a relatively low wage economy is not the an swer for Britain.

In terms of international locational-attractiveness competitiveness the Conservative government has a relatively successful record, creating employment in areas blighted by their own policies in the early 1980s. Nonetheless it is often forgotten that for much of the 1980s Britain was a net exporter of FDI ( An incoming Labour government might usefully establish a Òsocial auditÓ of FDI to inform debate about UK competitiveness and industrial policy.) At the same time there are lo ng-term dangers for the British economy if inward investment disproportionately centres on low-skill assembly operations and further locks Britain into a position as a low-wage economy.

In terms of ability to sell competitiveness Britain is still in a relatively weak position. Even during the deep 1990-93 recession the current account remained in deficit. Although there was initially a substantial improvement after the enforced departure from the Exchange Rate Mechanism in September 1992, over the last two years exports have become subdued compared to the rest of the economy. Britain has world class companies, but the source of its productivity shortfall is that is has a longer tail of poorly performing companies than most other countries.

Go vernments need to recognize that competitiveness - of either variant - is not only about wages, taxes and inflation. Rather than cost being the sole determinant of competitiveness, quality matters too both in terms of products and locational infrastruct ure and skill levels. In terms of the latter both central and local government can play an active role in increasing competitiveness. Neither can competitiveness in the first sense be used as an excuse in itself against a minimum wage or part-time worke r rights since the workers affected are overwhelmingly in areas where the goods and services are not traded internationally. Within the EU governments can help themselves by avoiding self-defeating competition over financial incentives and tax levels to attract inward investment, if necessary by formal rules.

Globalization, income distribution and social policy

Many commentators now assume that increased inequality is an inevitable consequence of globalization both because international competition with low wage workers in the newly-industrializing and developing countries causes unemployment and because governments can no longer use redistributive taxation and social policy to reduce income differentials. In both contexts Germany is o ften used as an example of a state which in the age of globalization can no longer afford its generous welfare state and extensive labour rights.

The reality is more complex. First, as stated earlier, governments still have some considerable autonomy in taxation policy. Although governments are constrained where factors of productions are particularly mobile, elsewhere they can still levy taxes at levels they choose for themselves. Certainly international competition for investment and jobs does hav e an impact on the employment and wage levels of British workers, but increased social inequalities in Britain since 1979 are largely the result of the Conservative government's own policies. To a considerable extent the way the fruits of British econ omic activity are socially distributed remains a result of domestic political decisions. The top managers of British privatised utilities have not benefited from a change in economic conditions but from a change in political climate.

Second, Germany 's current social retrenchment is a complicated phenomenon. Whilst there can be no doubt that companies which relocate out of Germany are blaming high social costs and that the Kohl government is seeking to cut welfare state expenditure, there is no sing le cause of these developments. Germany has suffered from an appreciation of the Deutschmark in the last five years against the dollar which has reduced price competitiveness. At the same time the government needs to reduce its budget deficit to meet the Maastricht convergence criteria and confront the problem of unfunded pensions against the backdrop of an ageing population. Significantly, social benefits are probably carrying the burden of current adjustment in Germany because it is politically easie r to cut the cost of these than to force wages down. It is the overall package of wages and social benefits that Germany companies are rebelling against not social benefits in themselves.

Third, governments in the EU could, if they chose, enter agree ments on minimum rates to stop competitive bidding down of tax revenues and social provision, to try to limits the impact of international competition on levels of inequality.

It is simply not at all obvious that the British Conservative government's championing of labour flexibility and low income tax is either delivering a high level of actual employment ,when the comparative statistics are closely examined, or is the reason why internal investment is strong.

Globalization and multilatera lism: the rules of the game

Through out this paper we have stressed that the EU is a means through which European governments still have the capacity to exercise control. In a wider context we believe that some of the constraints imposed by globa lization would be best managed by a broad multi-lateral framework of rules to the benefit of both developing and developed states. Globalization can be good news for economies, firms and workers who are internationally competitive, but not so much for those who fall behind. As in any liberalized market, the disciplines imposed on poor performers are severe. Given the extreme differences which exist between rich and poor countries in the 'starting conditions', globalization is likely to exacerbate exis ting global inequalities unless conscious action is taken to address these differences. Efforts by developing states to catch up with industrialised countries in terms of competitiveness may result in falling labour and environmental standards as firms cu t costs, thereby resulting in increased environmental degradation, social exclusion, and economic exploitation . In the long term, cooperation within a framework of globally-negotiated rules and standards over social regulation, the environment and intern ational investment would help all states. New rules will need to be applied gradually so so that lower standards are permitted in poorer stares until their economies have developed sufficiently to be competitive within the same rules.

If a Britis h government wants to use international co-operation to support its domestic and international objectives, it needs to participate constructively within the EU. After the launch of the single currency the EU will effectively take the place of Germany in t he present triad G3 structure which is pivotal to the future of international economic co-operation.For this reason, it should be noted, that outside a single currency a Labour government will find it difficult to influence the international economic de bate.

Conclusion: Politics Matters

Interdependence between national economies through flows of money and goods is not a new phenomenon, but technological developments and the liberalization of national and international markets have certa inly changed the context within which national economies operate. Such developments have led some commentators to proclaim that governments are powerless. In this paper we have tried to challenge this view and insist that, despite undoubted constraints, governments can still act positively to the benefit of their citizens and the most disadvantaged in particular. Neither domestically nor internationally does economic policy have to conform to the shibboleths of the New Right.