The Foreign Service Journal, April 2007

has benefited the overall economy by increasing incomes and decreasing prices, people see many of the bene- fits going to the well-educated or well- connected — instead of them. The biggest winners are often graduates of elite universities, while the losers are often industrial workers. The winners go to Davos while the losers lose their jobs at General Motors. Combine fears of change, a per- ceived race to the bottom and increas- ing inequality, and a backlash against globalization seems almost inevitable. It also raises serious questions about the purpose of trade and globaliza- tion. If openness inevitably leads to a bigger economic pie at the cost of inequality, is it worth it? Richard Wilkinson in The Impact of Inequal- ity (New Press, 2005) points out that a society marked by high levels of inequality is more prone to violence, poorer public health and higher levels of depression. Highly unequal places also seem more prone to political unrest and extremism, which can undermine attempts at democratic government. Costs of Change The key problem with the tradi- tional arguments in favor of open economies, trade and globalization is that they fail to accommodate the con- cerns of those who stand to lose from these trends. The damage is real: As jobs are destroyed, communities and families are severely affected. When workers find their skills are obsolete, the lack of an effective safety net in many countries suddenly pushes fami- lies into poverty — or worse. Even when people don’t actually lose their jobs, the fear of it is pervasive. On top of this, it has become hard- er to change careers as the minimum qualifications for quality jobs have increased, and barriers to entry for new and displaced workers have risen. Increasing professional licens- ing requirements have also made it harder to switch jobs. Thirty years ago, a high school graduate could walk into a well-paying factory job in many developed countries; these days, even an auto-mechanic requires extensive technical education. Now if you want to be a mechanic in many places you need an Automotive Service Excel- lence certification before you will be considered. The ASE requires years of training and experience. Not everyone can afford this. Things are not easier for the edu- cated. A master’s degree is required for many professions where a bache- lor’s used to suffice — and specializa- tions within majors are rapidly be- coming the rule. It is not enough to be a biologist anymore; one must be a very specific kind of microbiologist. These changes have made it more dif- ficult and costly to change jobs. The demand for increasingly expensive qualifications threatens to transform the work force from a meritocracy of upward mobility to one of stratifica- tion, where those without means are left behind. The result can be a vi- cious circle: Increasing specialization combined with an environment of rapid change compels people to spend ever more time and resources to learn the skills required to perform a job that then quickly becomes out- dated. Four Models On many political issues, the right- left continuum has been slowly fading away in favor of more multidimen- sional approaches. In the economics field, two dimensions come to mind: the strength of the safety net and openness to change. The safety net refers to the government’s role in helping people cope with change. At one extreme, it does nothing. If you lose your job, it is completely your problem. At the other extreme, the safety net is so strong that it creates a negative incentive to work. The other dimension is openness to change. A change-oriented econo- my welcomes trade, has flexible labor markets and is focused on being com- petitive. It generally levies low tariffs on imported goods, welcomes foreign investment and ownership, pays low subsidies, allows flexible labor mar- kets, and has few domestic monopo- lies or state-owned enterprises. Such economies are characterized by high export rates, deregulated capital mar- kets, a convertible currency and a deregulated economy. Those systems closed to change follow the opposite policies. Some countries such as France, Germany and Italy, are well-off but resist change. They ameliorate the dis- sent created by high unemployment through a generous welfare state. Although these governments are gen- erous, the lack of sound economic poli- cies and high taxes are impediments to long-term economic growth. Because this system is expensive and relies on a weakening economy, it is not sustain- able over the long run. By contrast, the United States is open to trade but does little to assist workers in case they are laid off. Compared to what other nations allo- cate for unemployment compensa- tion, the U.S. is stingy. According to a 52 F O R E I G N S E R V I C E J O U R N A L / A P R I L 2 0 0 7 Trade liberalization is often portrayed as an agent of imperialism in developing countries and a driver of the “race to the bottom” in the rich countries.