Globalization has been linked to social disintegration and political backlash against trade. How can this happen? And if we can absorb the shocks of globalization on society, what are the relevant policies to do so? Kasper Vrolijk proposes a framework that links globalization to social cohesion outcomes, identifying three channels through which cohesion is affected: workers, households and firms.
It has become increasingly clear that economic globalization has social and political implications. Rodrik warned in his seminal book that ignoring the social consequences of globalization can lead to social disintegration and a political backlash against trade. A few years later, Putnam also recognized that “global economic transformations have a significant impact on community life”. Indeed, anecdotal and empirical evidence suggests that recent globalization has led to an anti-globalization backlash and a return to protectionism.
How does globalization induce social repercussions? And if we can absorb the shocks of globalization on society, what are the relevant policies to do so? In a recent article, I propose a framework that links globalization to social cohesion outcomes, identifying three channels through which cohesion is affected: workers, households, and firms. With this framework at hand, I examine recent evidence to understand how trade and FDI can alter six dimensions of cohesion: political and interpersonal trustnational and group identify, and civil and political participation.
I find that globalization significantly affects different dimensions of cohesion, such as interpersonal trust and participation, altering cohesion through absolute and relative changes in employment and expenditure (and people’s perception of these changes). Unfortunately, the evidence is thin and we lack data on (i) the effects of FDI, (ii) some dimensions of cohesion (e.g. political trust, identity, cooperation), and notably, (iii) How? ‘Or’ What positive the shocks of globalization affect cohesion. A review of other secular or cyclical trends shows that they may partly explain changes in cohesion (e.g. automation, immigration), while globalization shocks have likely aggravated some trends (e.g. inequalities).
How does globalization affect cohesion?
The shocks of globalization turn out to be propagated frequently outside the economic sphere. In the United States, economic decline resulting from increased competition from Chinese imports has affected social identity and made individuals more likely to adopt authoritarian values. Increased competition from Chinese imports has also led to increased voter turnout, suggesting increased political participation, and reduced labor force participation, suggesting exclusion from society. In Brazil, trade liberalization has led to the displacement of workers into unemployment and informality. Furthermore, trade shocks negatively affect physical and mental health, which in turn decreases healthcare utilization and increases hospitalizations.
These social impacts are relevant because they come with substantial economic costs. Interpersonal trust was found to explain a large part of the evolution of economic development. Furthermore, trust and cooperation reduce transaction costs, increase investment and improve the quality of policies. Trust is also important for the effective functioning of large organizations, such as governments and professional societies. It turns out that social cohesion also increases health outcomes and the use of health services.
These globalization shocks operate mainly through the channel of income and expenditure. Related evidence on recessions reveals that increased unemployment following a recession leads to a decrease in trust in government and in interpersonal trust. Although we lack evidence on how globalization affects cohesion through spending, it is suspected that globalization shocks, such as price inflation, may cause unease with government or improve political participation. , or reinforce group identity in ways that do not promote overall cohesion. This is what food price studies suggest; rising prices lead to public unrest.
A recurring observation is that workers and households assess their attitude to the shocks of globalization based on their own local experiences. People with positive or neutral experiences of trade shocks are more likely to say that trade makes businesses more competitive, increases innovation and increases GDP growth. Furthermore, policy preferences tend to depend on the perceived fairness of a trade shock, suggesting that identity with a particular group or with a nation matters for how people respond to trade shocks. globalization. This implies that the distributional effects and people’s perception of the effects of globalization are important in understanding how the shocks of globalization translate into social repercussions.
To understand how globalization affects cohesion, it is further relevant to recognize a recent trend: an increase in the market power of multinational enterprises (MNEs) in world markets. Data shows that a few multinationals increasingly capture a large share of global markets and in doing so are able to set prices (in product markets) and wages (in labor markets) . Although we lack data, this implies that the gains (damages) of FDI on employment and expenditure are probably smaller (larger), which means smaller positive (larger negative) impacts on cohesion.
Of course, social cohesion can be affected by a range of other secular or cyclical trends (eg technological progress, rising inequality) and globalization may not be the most important factor. Automation, for example, has been shown to increase productivity levels, but also to reduce the share of labor-intensive tasks in production. Data on the EU actually show that changes in cohesion are driven simultaneously by globalization and automation. At the same time, some studies find that the social impacts of globalization depend on the context in which it occurs, suggesting that globalization can exacerbate existing grievances (eg, inequality).
Can the social repercussions of globalization be absorbed and how?
The evidence suggests a range of policy options to limit the negative impacts of globalization on cohesion. Address absolute labor and expenditure losses due to trade shocks or foreign direct investment, past policy prescriptions remain valid; the introduction of social benefits to temporarily mitigate losses, or investment policies to stipulate employment and wage gains, or programs that cap price increases, are still on the agenda.
However, when defining the policy, it is particularly important to (i) relative losses due to the shocks of globalization, (ii) recognize economic costs social impacts, and (iii) address cyclical or secular trends which can amplify the shocks of globalization. This implies that institutions and policies need to be tailored to those most likely to be affected by a shock, for example, those at the bottom of the income and skills scale. Moreover, the investment incentives that governments frequently use to attract multinationals should, in addition to assessing the labor and expenditure gains of foreign direct investment, also take into account the social repercussions (and their economic costs), although the costs are often difficult to quantify. Finally, while globalization exacerbates existing grievances (e.g. inequality), it requires broader, longer-term policies to address the structural issues underlying those grievances (e.g. education system reform) .