Thursday 13 December 2018

The truth about globalisation - and its mistaken discontents

Critics of globalisation are barking up the wrong tree. The real danger is a reversal of openness, writes Dan O'Brien

Trader Gregory Rowe feels the strain as he works on the floor of the New York Stock Exchange — US stocks fell with other markets around the world last Friday after the Trump administration stepped up the trade dispute with China. Photo: AP
Trader Gregory Rowe feels the strain as he works on the floor of the New York Stock Exchange — US stocks fell with other markets around the world last Friday after the Trump administration stepped up the trade dispute with China. Photo: AP
Dan O'Brien

Dan O'Brien

Ireland is the biggest tax haven in the world. That was the claim made by two foreign academics in recent days. They say that globalised companies here and elsewhere around the world are dodging taxes in mind-boggling amounts.

Last Tuesday, the agency tasked with luring globalised companies here, IDA Ireland, announced that the numbers of jobs created by such firms grew yet again in early 2018 compared to the same period last year. One in 10 people who go to work every morning go to a foreign-owned, internationally-focused business.

Quite separately, a German think-tank also published a study last week which found that Ireland was one of the biggest beneficiaries from the globalisation process.

Globalisation is big. It is all around us. It has many dimensions. The economic dimension is among the most important in terms of how it affects lives.

People around the world - as individuals or as employees of companies - are doing more business across borders than ever before. They travel, trade, move money and share data. This has made the world a more prosperous place. It has also contributed to reducing inequality across the planet. Poorer countries, which have been growing more rapidly than richer ones in recent decades, have been able to access foreign markets, capital and technology to fuel their development process.

Despite all this, globalisation has a bad rap. That is the case across the political spectrum. Some on the right, who are suspicious of foreigners, prefer national ways of doing most things over international ways. Some on the left, who are suspicious of business, see a corporate conspiracy behind every bad thing that happens in the world. Plenty of apolitical people are sceptical, if not fearful, of globalisation too.

But these fears are mostly misplaced. Globalisation has lots of upsides and its downsides are much exaggerated.

One of the arguments most frequently made against globalisation is that it destroys jobs. The rationale behind this claim is that companies tend to move to low-wage economies, leading to plant closures and rustbelts in places where pay is high. This certainly happens. And it has been happening for decades. But globalisation also leads to the creation of jobs, as the IDA figures last week showed yet again.

The net effect is what is really important. To see that, we need only to count the number of jobs in rich, high-wage countries. What we find is that there are record numbers of jobs in almost every rich country, from Australia and Japan to the US and Canada.

The same is true in Europe. In the 15 rich, long-standing members of the EU, there are more than 182 million people working today. That is 30 million more than 20 years ago. The past two decades have been the most globalised period in world history, and the growth in employment has also happened despite the huge job-destroying effects of the protracted financial crises from 2008 to 2012.

Next week's jobs figures for the first three months of this year should also show a record number of people at work in the Republic, with the pre-crash peak being surpassed for the first time. This is of a piece. Ireland's economic history since independence illustrates almost perfectly how economic openness brings job while closing down brings stagnation.

The Irish economy was very unglobalised for the half- century after independence. Between the first post-independence census in 1926 and that of 1961 there was a one- fifth decline in employment. Compare that with the 25 years since Ireland's period of globalisation-supercharged growth began. There are now twice as many jobs as in the mid-1990s. A doubling of employment compared to a contraction in the years of autarky says it all when it comes to making the case for the link between openness and jobs.

Apart from the jobs issue, another claim made by globalisation's opponents and sceptics is that it leads to a "race to the bottom" in everything from product standards to wages.

Their argument is that companies will go to countries where, for instance, costly health and safety standards in the workplace are low. That will put pressure on other countries to lower their health and safety standards too. In the end, such standards will disappear everywhere. The regulatory bottom will eventually be hit.

Although there is a logic to this argument, there is very little evidence to support it (with one exception, which is discussed below). Environmental standards have risen in leaps and bounds almost everywhere over the decades, as awareness of the costs of pollution has increased. The same is true of health and safety standards. Some countries have loosened their labour laws, but that has usually been less about globalisation and more about the realisation that the delicate balance between the rights of employers and the rights of employees had tipped too far in favour of the latter.

The one area where globalisation has had a race-to-the-bottom effect is corporation tax. The rates at which governments tax profits has been falling across the world. That is a hard fact. There can be little doubt that competition to attract multinationals, and the jobs that they bring, has been driving that trend.

Another aspect of globalisation that its critics are correct about is the increased levels of tax avoidance by companies using clever accounting practices in different jurisdictions. There is little reason not to think that, as the number of companies that have operations in multiple jurisdictions has increased, so too has avoidance.

The report referenced above, claiming that Ireland is the biggest tax haven in the world, is only the latest example of Ireland coming in for flak over the presence of multinationals and their tax arrangements here.

As in the case of jobs, the question to be asked is what is the net effect of this? Here again, the answer is in the hard data.

Across the club of mostly rich countries that comprise the Organisation for Economic Cooperation and Development (OECD), profit tax revenues have been trending upwards over the decades, not evaporating in a welter of mass multinational avoidance. As both a share of GDP and as a percentage of governments' total tax revenues, they have been rising, albeit only slightly, since the 1960s when OECD records begin. And that has happened despite profit tax rates falling over that time.

These figures would suggest that agreement among members of the OECD to clamp down on tax avoidance are, for the moment, broadly proportionate.

The big danger for Ireland and the world is not the excesses of globalisation or more globalisation. It is deglobalisation. With Britain pulling out of Europe, Donald Trump throwing tariffs on trade and an uptick in protectionism around the world, it is possible that the entire globalisation process could come to a halt. It could even go into reverse. That would make the world much less prosperous. It would also close down the fastest route to development for the poorest parts of the planet. Both would be hugely regressive steps.

Sunday Independent