One of the most challenging trends for the Social Market Economy is definitely globalization. The age of globalization can be defined as an era of worldwide integration of economic, technological, sociocultural and political processes finally unifying people of the world into a single society (Croucher, 2004, p. 10).
Fast technical progress in modern information and communication media, rising cultural exchange and increasing mobility of people are some expressions of globalization.
Economically, globalization, ahead of all other things, means international and global competition. More and more economic interconnections are established as well as international trade on financial and goods markets is taking place, is even of growing importance. The most important characteristics of globalization are worldwide deregulation and the coalescence of global markets, the collapse of the Eastern Bloc, the creation of a European domestic market along with the introduction of the Euro and the Eastern Enlargement as well as processes of regional integration and the emergence of supranational bodies in different parts of the world such as free trade agreements like NAFTA, MERCOSUR, and ASEAN (Kesting & Nielsen, 2003, p. 369).
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It can be concluded that interdependencies affecting all areas of life are increasing in number and strength. In this context, it also needs to be stated that globalization has always taken place in human history. Nonetheless, globalization has without doubt accelerated enormously since the downfall of the iron curtain due to political changes as well as technical progress and, nowadays, seems to be unstoppable. The world and its interdependencies and, most notably, its economic integration have become very complex and even too complex for most so that due to a general lack of competences it is hard to understand and explain current proceedings (Weizsäcker, 2000, p. 48). As a result, many people perceive globalization as a threat and are heavily alienated by it. An anti-globalization movement emerged, which sees more disadvantages than advantages.
Nevertheless, Weizsäcker (2000, p. 47) claims that throughout the 20th century all levels of society in Germany have benefited from globalization. Generally, the material living standard has at least known a tenfold increase, but the benefits can also be measured in the individualizations of lifestyles, rising local mobility, an essential reduction in working hours and, thus, greater autonomy in spending one’s time. Further manifestations are an increasing variety of products and more, smaller industrial sectors with, at the same time, augmenting productivity. Globalization also means the refinement of division of labor and increasing professionalization (Weizsäcker, 2000, pp. 13-15). Moreover, in the German context, it has to be stated that the prosperity of the society like in all industrialized countries has profited from free world trade. The German “Wirtschaftswunder” is a prime example of export-led growth and, insofar, Germany has benefited significantly by free international trade (Weizsäcker, 2000, p. 50). After the Second World War, it can be ascertained that the doctrine of beneficent effects of international trade became accepted. Even economists have widely agreed upon this. In practice, the GATT system pursues this objective but free international trade is not realized yet.
2.2.2 CHALLENGES OF GLOBALIZATION
However, the actual public opinion in society definitely differs strongly. The current debate in the media is marked by negative reports about the relocation of firms leaving Germany and sometimes thousands of unemployed. The explanation is nearly always the same, stating that the business location “Germany” is no longer competitive and that production has to be relocated into low-cost countries in order to gain benefits of lower labor costs. Indeed, while the historical benefits and basic positive model of globalization are undoubted, the face of globalization has changed and its effects have become more tangible. Furthermore, it is important to understand that globalization has always required ongoing adjustments and reforms. In order to realize the positive welfare effects, a couple of challenges must be mastered.
As a main challenge, the increased stress of worldwide competition can be identified. Since the economic involvement of countries with lower living standards, there is an excess supply of unqualified employees (Weizsäcker, 2000, p. 53). Consequently, unqualified employees in industrialized countries in Europe have the impression of soon losing their job. Instead, in the U.S., unqualified employees rather feel the compulsion to reductions of wages or social services (Kesting & Nielsen, 2003, p. 372). Thus, a second challenge emerges. There is an enforced pressure for industrial restructuring because of free trade and free capital movement towards Central and Eastern Europe (Kesting & Nielsen, 2000, p. 374). This structural change needs active designing, because it creates winners and losers, at least for the short term.
Moreover, the globalization enforces the institutional competition, which builds up the pressure to reduce taxes and deregulations, environmental and social policies (Hillebrand & Welfens, 1998, p. 415). The institutional competition has intensified due to deeper international market integration and the controlling function of national economic policies by financial markets (Kösters, 1998, p. 442). Nevertheless, this has also the positive effect of identifying best political practices in order to achieve a new and more efficient institutional equilibrium (Hillebrand & Welfens, 1998, p. 405).
Another challenge often been referred to is that globalization reduces the repertoire and effectiveness of national economic policies (Kesting & Nielsen, 2003, p. 370), empowering world markets and multinational companies to determine national policies (Weizsäcker, 2000, p. 48). This can be justified in policy constraints such as the disappearance of macroeconomic instruments. It has become impossible to effectively control money supply and interest rates. In consequence, the effectiveness of national monetary policy is undermined and the economy becomes vulnerable to speculative capital movements. Furthermore, Keynesian demand management appears to be less effective due to spillover effects of demand expansion across borders (Kesting & Nielsen, 2003, p. 370). Notwithstanding this, Denmark has found a way to avoid negative impacts as will be shown further in the fourth chapter. Countries of the European Union are institutionally constrained by the three percent deficit limit imposed by the EU Stability and Growth Pact (Kesting & Nielsen, 2003, p. 374). As a further challenge for governments, the need of enhancing the attractiveness for international mobile capital as well as creating and guaranteeing functioning, flexible markets can be determined (BMWI, 2008). In addition, some economists attribute also challenges regarding ideological implications to globalization. As supranational organizations like OECD and IMF consistently advocate neo-liberalism, arguments of competitiveness and flexibility dominate debates about globalization (Kesting & Nielsen, 2003, p. 371). However, the main focus and emphasis of society and economy necessitates clear definition and alignment of strategies and measures.
In summary, globalization can, thus, be seen as a challenge to a country’s and a society’s ability to determine its position and implement necessary reforms in order to cope with global stress of competition and to develop national strengths to create comparative advantages.
2.2.3 DISCUSSION OF ECONOMICAL IMPACTS AND MECHANISMS
There is a consensus that globalization has the effect of promoting professionalization and international division of labor (Weizsäcker, 2000, p. 15). Therefore, there is a need for industrial structural change. Furthermore, there is also consensus that globalization intensifies international competition, but as Germany has a relatively high standard of taxes, labor costs, environmental obligations, and an extensive net of social security, its economy is often assumed to be non-competitive (Weizsäcker, 2000, p. 234). Following the most popular interpretation, it is argued that more favorable investment opportunities in foreign countries lower social measures and that social services, in the end, become cost-factors and, therefore, an important competitive disadvantage. High unit labor costs have the result of investments avoiding German and preferring foreign locations (Paraskewopoulos, 1998, p. 234). Because globalization undermines capacities for compensation and the political basis for financing the welfare state, tax cuts and reduction of social security contributions are the result. Thus, globalization is held responsible for the necessity of welfare retrenchment and, more directly, increased international competition is often blamed to be associated with downward pressure on wages (Kesting & Nielsen, 2003, pp. 370-372).
However, there is no consensus regarding this question. Other economists argue differently about those mechanisms and draw different conclusions. Weizsäcker (2000, p. 57) argues that each country has its own preferences towards the extension of social security and creates its societal system accordingly. The system of market economy is based on freedom of choice for consumers. The question, which social policy is executed, is finally a question how the national income is used or consumed. Consequently, there is also freedom of choice regarding the question how much of the income is raised through taxes and redistributed for social purposes. In all western societies, social services are funded through social security contributions and taxes. In Germany, social expenditures account for two thirds of the total public expenditure (Weizsäcker, 2000, p. 59). As a result of international competition, a national level of wages, the competition wage, is determined by national productivity. The competition wage consists of two parts: The individual wage is paid out directly to the employee, while the collective wage is collected by the state. In Germany, this happens through income taxes, care insurance, unemployment insurance, as well as contributions to the pension fund (Weizsäcker, 2000, pp. 62-64). As the height of the competition wage is fixed, which means that it is not affected by any changes in social policies, social policies only decide how much of the competition wage is used for public purposes and how much is directly paid out to the employee. For example, if the government decides to raise social contributions, the collective wage is raised, so that the determined competition wage is exceeded for a short time. This implies a decline of the domestic economy, high unemployment rates, lower exports, and higher imports. This situation cannot persist, so that wages would decrease and the competition wage would return to its original level (Weizsäcker, 2000, p. 61). As a result, the competition wage is not affected by social policies in the long term. Because of economical adjustments, this finally implies that the individual wage is reduced. Therefore, it can be stated that if market mechanisms work properly, social policy is not redistribution between employers and employees but instead redistribution between employees (Weizsäcker, 2000, p. 64). Hence, Weizsäcker (2000, p. 72) concludes that, in the long term, there are no competitive disadvantages arising out of higher levels of social services, and that national policy in the fields of social policies, taxes and environmental standards are not constrained at all by international competition.
Subsequently, there is also disagreement concerning the constraints of national economic policies. In contrast to the argument that competition has a downward effect in these fields, Weiss (2002, p. 2) concludes that the state has much more room for maneuvring than it is generally assumed. Globalization even has enabling effects according to him. For example, Weizsäcker (2000, p. 93) argues that a state has autonomy in the determination of levels of profit taxes. The higher the tax, the lower the competition wage. This means that higher taxes are passed on the employees and, thus, do not constitute a competitive disadvantage.
The solution finally seems to be that adjustment is the basic condition for the functioning of those long-term market mechanisms in order to master the challenges of globalization. This is, however, currently not given in Germany due to the still highly inflexible labor market. Hence, negative consequences rather follow from market failures and the failure of policies such as subsidy policies. Therefore, social and political impacts of globalization vary significantly dependent on the mediating role of the institutions of nation states (Kesting & Nielsen, 2003, p. 372).