The Standing Senate Committee on Social Affairs, Science and Technology
Final Report On Social Cohesion
Chapter 2
What Do Globalization and
Technology Do to Canada?
The Development of Canadian
Social Citizenship
The Role of the Private Sector
The Pressures for Change
The Process of Economic Globalization
The Social Engagement of Corporations
The Erosion of the Postwar
Social Consensus
Competitiveness and
the ‘Race to the Bottom’
Policy Implications
What Do Globalization and Technology Do to Canada?
In his masterpiece on the growth of the market economy in the 19th century, The Great Transformation (1944), Oxford economic historian Karl Polanyi made two famous observations about the relation between market and society, both of which are still very relevant today. The first concerned the idea of the self-regulating market, the 19th century laissez-faire attempt to create "an economy directed by market prices and nothing but market prices". Polanyi thought the attempts aberrant, because "man’s economy, as a rule, is submerged in his social relationships". Thus, "control of the economic system by the market is of overwhelming consequence to the whole organization of society: it means no less than the running of society as an adjunct to the market". Polanyi’s second observation was the claim that when the attempt was made under laissez-faire to allow the market to be self-regulating, society protected itself in what he called a "double movement", a process in which the expansion of the market was countered by society. This double movement, he said, was based on two principles: "one was the principle of economic liberalism, aiming at the establishment of a self-regulating market,…the other was the principle of social protection aiming at the conservation of man and nature". This "was more than the usual defensive behavior of a society faced with change; it was a reaction against a dislocation which attacked the fabric of society, and which would have destroyed the very organization of production that the market had called into being". Polanyi argued that the great pace of international commercial exchange (the first part of the double movement) initiated a process of social revolution which eventually led to the First World War. |
This is not the first time in history that societies have faced the consequences of a truly global market. The world economy was possibly even more integrated at the height of the British colonial empire in the 19th century than it is now. Trade volumes between North America and Europe continuously increased between the late 19th century and the First World War.
But research shows that this "first round" of globalization also had a negative impact on income distribution: in the 19th century, inequality rose in rich ountries in a way similar to what is happening today.(15)
Research also indicates that the inequality trends which globalization produced prior to World War I were at least partly responsible for rising protectionism and for the interwar retreat from globalization.(16)
The question that arises now is clear: Will the world economy of the next century also retreat from its commitment to globalization because of its unequal sharing of burdens and rewards?
After the Second World War, the world witnessed a second round of globalization following the establishment of the General Agreement on Tariffs and Trade (GATT) and the growth of international trade. But the basic difference between the first and second period of globalization lies in the way each period did (or did not) deal with the social effects of economic globalization. The first round went hand in hand with economic laissez-faire. In the late 19th and early 20th century, rising economic inequalities remained unaddressed, leading eventually to political turbulence, revolution and even war. But after 1945, international economic integration went hand in hand with the development of the welfare state. From 1950 to the OPEC crisis in 1973, the so-called "golden era", economic performance improved and per capita income grew rapidly. During this period, there was near full employment and social inequalities declined. Dynamic growth went hand in hand with increasing economic and social cohesion.
In the postwar era, there was a broad social consensus in Canada in terms of the relationships between the state, market and community. This socio-economic consensus was based on new ideas emerging from Keynes, Beveridge in Britain, the Marsh Report on social security in Canada, and on the genuine fear that the end of the war could bring on another slump like the Great Depression.
In Canada, the basic goal of the postwar social consensus was to provide social protection against the economic risks inherent in modern life. The postwar consensus was designed as an instrument of social integration and nation-building.
In the postwar period, international trade and the welfare state expanded simultaneously as governments sought to provide a cushion – a social safety net - against the risks of exposure to international economic forces. Countries like Canada with comparatively open economies were inevitably more sensitive to global pressures and as a result, many of them adopted relatively generous social programs as a means of cushioning workers and their economies from economic shocks originating outside their borders.
The GATT was critically important in underwriting one of the most remarkable periods of economic growth in human history, which in turn swelled public coffers and helped to finance new social commitments. The expansion of social programs helped open economic borders by reducing potential domestic opposition to trade agreements. In the view of one expert, "governments asked their publics to embrace the change and dislocation that comes with liberalization in return for the promise of help in containing and socializing the adjustment costs1."(17)
This, according to some recent research done by the Institute for International Economics in Washington, shows that "the need for social insurance does not decline but rather increases as global economic integration increases."(18) Or, as one witness said in reference to an argument made by the great economist Joseph Schumpeter on the link between trade and the need for social insurance: "Motor cars are travelling faster than they otherwise would because they are provided with brakes. In the context of the welfare state, this means that you can only accept our rapid globalization if you have the brakes, if you have the protections for the people inside" (Professor Alain Noel, University of Montreal, October 20, 1998).
~ Keith Banting, The Internationalization of the Social |
The Development of Canadian Social Citizenship
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In Canada, the "brakes" or the network of social programs that fostered the postwar economic growth, were developed through federal-provincial negotiations and in the context of a decentralized federation where provinces have equal constitutional power but unequal economic resources. These programs, which helped to entrench the sense of social cohesion that emerged after the war, rested on three pillars.
The first pillar consisted of federal programs that delivered benefits directly to citizens, such as Family Allowances, Unemployment Insurance, Old Age Security, the Guaranteed Income Supplement, and the Canada Pension Plan. The second pillar was composed of shared-cost programs, which provided federal grants to provincial governments to support health care, post-secondary education and social assistance, and which sustained a pan-Canadian approach through a number of conditions attached to the transfers. The third pillar was the system of equalization grants provided by the federal government to poor provinces to enable them to establish public services of average quality without having to resort to above average levels of taxation.
In combination, these three pillars sustained a national sense of social cohesion that went beyond the relationship between governments and citizens to include the shared values and experience of all Canadians, irrespective of economic status, language, ethnicity or province.
The Canadian experience was part of a much larger trend across western countries. As the great British sociologist T. H. Marshall noted 50 years ago, social programs developed after the war added a new social dimension to citizenship in democratic societies. In previous centuries, citizenship had come to embrace civil rights and political rights, such as the right to vote. During the 20th century, a new social dimension was added to the concept of citizenship, by creating a structure of social rights and obligations which individuals enjoyed not on the basis of their class, religion, or language, but by virtue of their common status as citizens.
The Role of the Private Sector
The postwar social consensus or contract was not only about government policy, but a central aspect of it pertained to the private sector. As companies did better, their workers did too. Companies whose profits were increasing, shared their prosperity with their employees and the communities in which they lived. The social compact between employers, managers and employees was reinforced by labor unions, to which, after the war, a growing portion of the Canadian workforce belonged.
In Canada, the post-war success created a rich legacy of social cohesion. Canadians developed a strong sense of collective enterprise, of pooling risk, of participating in community life. When the Marsh report was issued in 1943, the federal government had a huge burden of war debt, but it made a commitment to both economic and social renewal – family allowances, housing, education, and other measures to help families get "back to civil life". These investments recognized that a lot of people came out of the war damaged – physically, emotionally, and financially.
Now Canadians are not coming out of a war in the traditional, military sense. But following more than 15 years of government and industrial restructuring, many of them are feeling alienated and stressed by change that seems to be beyond anyone’s control. As a result, they are losing faith in themselves and in the political process. What we need now is to reinvent the social consensus that has been undermined by technological change and the ravages of international economic restructuring.
As in other Western countries, the postwar social consensus in Canada has undergone a continuing series of adjustments in response to global economic pressures. This process of re-definition – in which we can trace the roots of the current social cohesion malaise - essentially began after the oil crisis in the early 1970s which plunged the world into a new era of high inflation rates, slow economic growth and unemployment. By the late 1970s, a number of countries were witnessing double-digit inflation and a growth in social spending and the costs of government that outstripped growth in the economy. The standard Keynesian response of increasing government spending to deal with rising unemployment appeared ever more inappropriate in the face of inflationary pressures and growing government deficits.
Observers began to write about a "legitimacy crisis" and a crisis of "governability". At the political level, governments and parties favoring a greater role for the state in society and increased public spending were losing public support. In the early 1980s, a new political agenda emerged in Anglo Saxon democracies. The new agenda spoke to a number of issues, but particularly to the role of government in society. Deregulation, privatization and cutbacks in public spending were high on the policy agenda as decision-makers sought to liberate markets from excessive government intervention and planning.
The Process of Economic Globalization
A major way whereby the economy was to be given more freedom was through the introduction of initiatives to accelerate the liberalization of trade and investments. In the late 1980s observers increasingly began to use the term "globalization" to describe the processes of continental economic integration such as those taking place in Europe and North America.
The term "economic globalization" refers to the establishment of more integrated world-wide markets for technology, investment, production, and consumption. Implications include increased mobility across borders of financial capital, knowledge, and expanded high-speed telecommunications and transportation networks which make it possible to coordinate operations in many countries at the same time.
The impact of economic globalization has been reinforced by wider technological innovations, which have triggered sweeping changes in the production and distribution of goods and services. Technological change and the rise of the new Information Society are transforming the economic and industrial structure of the country. They are leading to job destruction as well as new job creation. As Table 3 in Appendix C indicates, professional positions accounted for over half (56 percent) of all the jobs created by new technologies. In sharp contrast, the lower skill, intermediate-level occupations represent close to 60 percent of the job-types being eliminated.
For his part, Jim Stanford, Economist with the Canadian Auto Workers (CAW) is concerned about the concentration of wealth in Canada, "I am fairly confident in arguing that it looks like as much as 40 percent of all net financial wealth in Canada is owned by just the top 1 percent, the richest 1 percent of society. [. . .] The consequence of social cohesion that I would argue is that you get a very concentrated power base. People who have a very large and disproportionate stake in the financial industry, . . . will argue for the types of financial and economic policies which will benefit the financial industry, often, I would argue, at the cost of those who actually have to work for a living." (Jim Stanford, Economist, Canadian Auto Workers (CAW), June 8, 1999)
The Social Engagement of Corporations
In Canada as elsewhere, globalization is very much driven by transnational corporations whose trade is mostly (over 60 percent) conducted on an intra-firm or intra-company basis.
According to the United Nations, transnational corporations (TNCs) have shown remarkable growth in recent decades: between 1980 and 1992, TNC sales more than doubled, from $2.4 trillion to $5.5 trillion, and by 1994 there were 37,000 parent corporations with over 200,000 affiliates worldwide. TNCs account for a third of world production and trade. |
Transnational corporations are thriving in the era of globalization. Some argue that transnational corporations, rather than national governments, are now shaping the international economic environment.(19) The rise of transnational corporations delivers a significant blow to social cohesion and to the postwar social consensus. These corporations do not carry national flags. Ownership of such corporations is increasingly spread among several nations, and the various components of major products are each produced in different countries. They operate on a world-wide or global footing. They have no nationality and are not rooted in any local or national communities. Today, in the new global economy, corporations and those who manage them are not as economically dependent on the local or regional economy as they once were, and thus have less self-interest in insuring the well-being of citizens.
With globalization, the postwar notion that as companies do better, their workers should too, unraveled in the 1980s. Profitable companies now routinely downsize their work forces, to the point that now some talk about "corporate anorexia". Companies are replacing full time workers with contractors, temporary workers and part-timers. They are often subcontracting work to smaller and non-unionized firms offering lower wages and benefits.
In the United States, the former Secretary of Labour, Robert Reich, talks about "social secession" to describe how, in his view, globalization loosens the civic glue that holds society together and exacerbates social fragmentation by reducing the civic engagement of corporations, and by making it easier to outsource to other countries than to enter a debate on how to revitalize the local economy.
Globalization also affects the social engagement of internationally mobile groups. Geographic mobility is a key factor in the new global economy. Reduced barriers to trade and investment accentuate the asymmetry between organizations and groups that can cross international borders and those that cannot. In the first category are the large, transnational or global corporations as well as the highly skilled workers and many professionals who are free to take their resources where they are most in demand. Most small businesses as well as unskilled and semiskilled workers and most middle mangers belong in the second category. Globalization makes the demand for the services of individuals in the second category more elastic – that is, the services of large segments of the working population can be more easily substituted by the services of other people across national boundaries.(20) Globalization therefore fundamentally transforms the employment relationship.
The Erosion of the Postwar Social Consensus
Globalization and technological change are eroding the postwar social consensus in at least three major ways:
- The fact that workers can now be more easily substituted for each other across national boundaries, undermines the postwar social bargain between workers and employers, under which the former would receive a steady increase in wages and benefits in return for labor peace.
- The restructuring provoked by globalization creates more need for social insurance and policies that support the adjustment or workers and communities.
- Globalization and technology are breaking the balance between the international economy and the welfare state that prevailed during the postwar era. In the postwar era, social spending has had the important function of buying social peace. But globalization is now making it more difficult for governments to provide social insurance – one of their central functions and one that has helped maintain social cohesion and domestic public support for ongoing liberalization throughout the postwar period.
This does not mean that globalization and technology are necessarily limiting the power of governments. It is not true that nation-states are impotent in the face of globalization.(21) But globalization does limit the range and effectiveness of policy instruments which governments have traditionally used to address social and economic problems.
Governments in OECD countries face powerful contradictory pressures. On one side, they confront pressures for higher spending, much of which flows directly from economic restructuring. Higher unemployment, especially long-term unemployment, drives up the cost of unemployment and related benefits; and individual citizens, industries and regions seek new forms of protection from global competition or help in adapting to it. On the other side, globalization and technological change simultaneously weaken the capacity of policy-makers to respond. Governments are under pressure to redesign social programs in ways that remove rigidities in the labour market, enhance flexibility in the domestic economy, and reduce the fiscal burdens on the public treasury. In addition, many countries have felt a need to lower the tax and regulatory burden on production in order to remain competitive with other trading nations.
Competitiveness and the ‘Race to the Bottom’
It is this perceived need to lower regulations and standards that has prompted the recent debate about the "race to the bottom" as countries try to improve their competitive position in the global economy by harmonizing or lowering their social and environmental regulations, tax rates, wages and working conditions.
For example, in Canada there is currently a very important debate as to whether our level of taxation makes our economy less productive than the American economy, and encourages a "brain drain", i.e. the idea that our best and brightest (medical doctors, computer scientists, etc.) are leaving the country for the United States where tax rates are lower. Many in the political arena, the business world and in the media argue that taxes need to be reduced; that Canada needs to harmonize its level of taxation with that of the United States. For now, the empirical evidence supporting this theory is inconclusive and more research is needed to see whether there is a relationship between taxation and the "brain drain".(22)
But when decision-makers in the public and private sectors say that global competitiveness requires that governments lower their tax rates, many in the public fear that this will negatively affect our capacity to maintain an adequate social safety net. This is why, according to the OECD, "Globalization is often seen as a threat to systems of social protection."(23) In their testimony, Mr. Craig Forcese and Ms. Christine Elwell both said that large sectors of the population believe that the intensification of pressure from countries with lower taxes and less generous social programs (like the United States and Mexico) adversely affects Canadian labour market conditions, and reduces Canada’s ability to maintain its social safety net and labour market regulations.
Although many people believe instinctively that international economic integration must result in the degradation of Canada’s social programs, Professor Keith Banting, Director of the School of Policy Studies at Queens University, presented to the Committee empirical evidence showing that there is, in fact, no direct causal link between trade liberalization and the erosion of the social safety net (see Table 4 in Appendix C). For Canadians, the issue has always been whether we can maintain a distinctive social policy regime in the context of deeper economic integration with the United States. Historically, Canada established a more generous and larger welfare state than its southern neighbour. Is this legacy being overwhelmed by the imperatives of continental economic integration?
Overall, the answer is no. Canada still invests more in social programs than the United States. But as Table 4 in Appendix C shows, there is at least one area of convergence. This is the area of unemployment insurance. In Canada, the proportion of unemployed receiving unemployment benefits has always been higher. But fiscal pressures led to successive reforms during the 1990s that have reduced the overall generosity of the program thus making the Canadian and United States systems more similar than before. Reforms such as those introduced in the unemployment insurance system in the 1990s have created in the public mind the impression that globalization is the reason why our system of social protection is eroding.
In addition to pressures currently being exerted on the Canadian economy by competition from U.S producers, globalization also implies a more direct and more intense competition with developing countries characterized by substantially lower wages and working condition far below our own. Many fear that this will contribute to an even faster deterioration of the Canadian social safety net.
Such concerns have generated among OECD nations a debate on trade and labour standards.(24) In Canada and in other developed nations, the growing exposure to trade with less developed countries has raised the question of the respect of Core Labour Standards. In many rich countries, business associations and unions believe that
companies and workers are placed at a competitive disadvantage vis-à-vis companies in developing nations that do not respect Core Labour Standards. In developed countries, political leaders and union representatives have proposed the inclusion of a "social clause" in the World Trade Organization (WTO) agreements in order to limit the "race to the bottom", and to be able to use punitive trade measures against countries which allow violations of these standards. But at the moment, it seems that it will be difficult to give globalization a more "human face" because developing nations are opposed to the introduction of a Social Clause in WTO agreements.(25)
| The idea of anchoring social clauses in international trade agreements became important in the mid-1990s when the U.S. Vice President, Al Gore, said, at the GATT Conference of Ministers which led to the setting up of the WTO, that a world trade system which did not aim to put an end to exploitation would fail in the end because people throughout the world would not be able to support it. The USA was strongly supported in this opinion by Canada and France |
Even if more research is needed to show whether growing competitive pressure automatically leads to lower labour standards and a weaker social safety net in developed countries like Canada, what is clear from the "race to the bottom" debate, is that globalization is making it more complicated for governments to use, as they did in the past, their fiscal and spending powers to insulate domestic groups from excessive market risks, particularly those having an external origin.
Yet the need for insulating or providing social insurance for those in our country who suffer from the socially corrosive forces of globalization and technology has not diminished. If anything, this need has become greater as a consequence of globalization.
Policy-makers have to bear in mind the important role that the provision of social insurance, through social programs, has played historically in enabling multilateral trade liberalization and a resulting explosion in world trade. As the social safety net is being pruned, there is a real danger that this contribution will be forgotten. This does not mean more social spending and large budget deficits. It has been necessary to eliminate waste and reform the welfare state. But the message to reformers of the social insurance system is: do not sacrifice social goals for the sake of economic globalization.
In fact, one of the reasons why globalization gets critical reviews in many sectors of society today, is that policy-makers often fall into the trap of using it as an excuse for needed domestic reform. Large fiscal deficits and mismanagement are problems that affect socio-economic conditions - with or without globalization. Too often, however, the need to resolve a fiscal, social or economic policy problem is presented to the public as a consequence of global competitive pressures. This not only makes it more difficult to mobilize public opinion in favor of the required policies – why should we adjust for the sake of becoming better competitors against the Mexicans or the Americans? – it also erodes the domestic support for international trade. The lesson for policy-makers is, do not sell reforms that can be good for the economy and the citizenry as reforms that are dictated by globalization. Globalization is a human creation: it has been created by women and men to serve their needs and interests - not the other way around. As one witness said in concluding his testimony:
there is much more scope and need for national policies than is popularly thought. This is especially true for policies of the sort needed to build institutions capable of supporting equitable and sustainable growth. This requires economic policy-makers to take a broader than usual perspective, and to consider more explicitly the linkages among social, human and economic health. The need for such an enlarged perspective, and the corresponding need to take institution-building seriously, is one of the most striking lessons to be drawn from Canadian and international experiences.
(Professor John Helliwell, O.C., Department of Economics, University of British Columbia, December 9, 1998, p.9 of brief).