Social policy in open economies: Evidence: Harmonization or Sustained Divergence
Clearly, theoretical reasoning suggests that globalization and openness along with other forces can foster harmonization in any direction: downward to the lowest common denominator, upward to a higher standard, or sustained divergence. As is commonly the case, theory covers all bases; hence the need for an appeal to the evidence. The evidence, however, is not clear-cut. Gomez and Gunderson (2005) review the international evidence and particularly that of the United States and Canada. They conclude that increased openness has fostered a tendency toward harmonization of social policies and that harmonization has been toward the lower common denominator. Between the United States andCanada, for example, there has been recent downward harmonization toward the lower U.S. level in areas such as collective bargaining laws, minimum wages, unemployment insurance, equal pay laws, pension funding, and welfare and family benefits for working families. There has been sustained divergence in workers’ compensation and health and safety, however, and some upward harmonization to the higher U.S. standards with respect to age discrimination. They also cite a wide range of studies, especially by political scientists (e.g.,Garnett 1998), who tend to find more sustained divergence and emphasize that governments still maintain considerable degrees of freedomin setting their social policies in spite of greater openness and competitive pressures.
As indicated, Fields (1995 and other studies cited therein) have examined poor countries and indicated that as their incomes grow their demand for social policies also increases; that is, social policies are ‘‘normal goods’’ that are collectively desired and that can be afforded as income grows. In essence, the upward convergence of the income of poor countries toward that of wealthier countries also fosters an upward convergence in their social policies. It follows that prematurely imposing costly regulations on developing countries for example, as a condition of a free trade agreement can dampen the very growth process that would foster a natural upward convergence of social policies.
Countries of the EU did not experience a downward harmonization in their social policies as a result of the greater trade and capital and labor mobility after the formation of the union.This reflects the fact, however, that the EU Social Charter required the poorer countries such as Greece and Portugal to harmonize upward as a condition of entry into the EU. The EU also provided Social Funds to the poorer countries to facilitate their upward harmonization (Gomez and Gunderson 2005).
Even if there is a tendency toward downward harmonization, this should not automatically be regarded negatively. With greater openness, governments are simply under more pressure to pay attention to the cost consequences of their social policies; they face a ‘‘harder’’ rather than ‘‘softer’’ budget constraint. In such circumstances, social policies that are inefficient and involve mainly rent seeking (e.g., possibly procurement policies) are under the most pressure to dissipate since they do not foster the competitiveness that enables countries to ultimately afford their social policies. The competitive position of employers can be jeopardized by such policies, and their costs cannot be shifted back to workers since they do not have associated benefits for workers. In contrast, social policies that have positive feedback effects on efficiency and support a public infrastructure should survive indeed thrive under greater openness and competitive pressures since they foster competitiveness. The area of greatest concern, however, is whether governments can sustain pure equity-oriented social policies that do not have positive feedback effects on efficiency but protect the most vulnerable and disadvantaged groups in society. This is the main challenge to social policy under increased openness and competitiveness.