It has become commonplace to think that globalization has produced a race to the bottom in terms of labor standards and quality of life: the cheaper the labor and the lower the benefits afforded workers, the more competitively a country can participate on the global stage. But in this book the distinguished economic historian Michael Huberman demonstrates that globalization has in fact been very good for workers’ quality of life, and that improved labor conditions have promoted globalization.
About the Author
Michael Huberman is professor of history at the University of Montreal.
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Odd CoupleInternational Trade and Labor Standards in History
By Michael Huberman
YALE UNIVERSITY PRESSCopyright © 2012 Yale University
All right reserved.
Chapter OneThe Virtuous Circle of Trade and the Labor Compact
During the [nineteenth century] two great discoveries have been made in the science of government: the one is the immense advantage of abolishing restrictions on trade; the other is the absolute necessity of imposing restrictions on labor. And so the Factory Acts, instead of being excused as exceptional and pleaded for as justified only under extraordinary conditions ought to be recognised as in truth the first legislative recognition of a great Natural Law, quite as important as Freedom of Trade, and which, like this last, was yet destined to claim for itself wider and wider application.
George Campbell, Eighth Duke of Argyll, The Reign of Law, page 367.
Globalization does not rule out all egalitarian interventions.
Samuel Bowles, Globalization and Egalitarian Redistribution, page 121.
LABOR AND FREE TRADE IN THE FIN DE SIÈCLE
A hundred years ago, the patron of the Belgian Labor Party, Émile Vandervelde, rose in parliamentary debate and endorsed with conviction his country's free trade policy. In France, Germany, the United Kingdom, and elsewhere, labor leaders followed suit. In the shadow of labor's opposition toward free trade in the twenty-first century, how can we understand Vandervelde's and his comrades' enthusiasm?
The labor historian (Van der Linden 2003) might argue that Vandervelde was extolling the virtues of a transnational workers' organization, centered on the socialist Second International, a movement in which he himself played a leading role. Was his message a mere shibboleth? In the factories and in the mines, however, international socialism had made few gains, and most workers saw that their fate was attached to national movements. Contrary to expectations, international trade unions were strongest in North America, and only the ideologue would consider the mass of U.S. or Canadian workers revolutionary vanguards. In Europe, socialists had abandoned Marx for Richard Cobden, the British liberal free trader whose philosophy Vandervelde referred to as le manchestérianisme. But this does imply that workers and their leaders were prepared to embrace free trade wholeheartedly as liberal economists did. Free trade was part of a larger project to improve labor's well-being.
The economist (Stigler 1982) and economic historian (Gerschenkron 1943; Bairoch 1989) would answer that workers benefited from free trade because of cheap grain imports. By opening up markets, Belgium would reap the benefits of its comparative advantage. It was a labor-abundant and land-scarce economy, and workers would move out of agriculture and into labor-intensive industries like textiles. As manufacturing exports increased, so would have the demand for labor. The problem with this line of reasoning is that Belgium had had low tariff barriers since the 1860s. Why did it take organized labor a generation to support free trade? Was its adoption tied to other social and political projects?
The political scientist (Gourevitch 1986; Rogowski 1989) may suspect that Vandervelde was a fair-weather free trader, representing a narrow group of self-interested workers in the export sector demanding immediate attention. The trouble with this argument is that by the l880s, Belgium had an integrated labor market, the fate of all wage earners rising and falling together. Vandervelde embraced free trade because workers across regions and industries had something to gain by it. The reason why labor endorsed free trade lies elsewhere.
Vandervelde's own explanation, simple and direct, forms the backbone of my study. As Belgium integrated into the world economy, workers in the tradable sector confronted increased dislocation and uncertainty. Vandervelde's support of free trade was conditional on the adoption of a package of labor regulations and social entitlements, what I refer to as the labor compact, providing insurance against these hazards. Because these reforms required cross-class support, the argument had a political dimension. Free trade in the Old World marked the end of the ancien régime and the power of landowners, an outcome that aroused the support of liberals and manufacturers because of their overlapping interests. The collapse of agricultural tariffs would compel the state to tax land to finance newly created redistributive programs without sacrificing the benefits of trade.
Vandervelde grasped the two-sided relation between trade and the labor compact. By raising the price of labor, the new labor laws altered cost structures and induced firms to invest in modern technologies and upgrade product lines. The increase in wages caused improvements in labor productivity, firms and workers emerging as better exporters. Anticipating the line of reasoning of European social democrats after 1945 (Eichengreen 2007), Vandervelde concluded that international economic integration promoted social and political equality, and that egalitarianism would fasten workers' attachment to openness.
The primary objective of this book is to relate how Vandervelde's vision, shared by an international movement of reformists and social activists, came to be realized before 1914. I propose to show that trade served as a main pathway in the spread of the labor compact. I demonstrate that the feedback between trade and the labor compact was much stronger in Europe than elsewhere. I conclude that the first great wave of globalization had enduring effects in the development of 'social Europe' and 'liberal America' (Pontusson 2005).
The historical relation between trade and the labor compact resonates today. For the period since the 1960s, Dani Rodrik (1997, 1998, 2011; Cameron 1978) observed the positive relation between international exposure and state intervention. But there is a competing view. Lawrence Summers (2008), for one, remarked that "global considerations constrain competitiveness," raising the costs of providing social protection. While the verdict will never be known with certainty, history serves as jury to the ongoing deliberations.
WELFARE STATE FUNDAMENTALISM
Certain components of the labor compact, like limits on work time, are not considered typical welfare-state benefits because governments commit fewer resources in their provision than in the delivery of unemployment insurance and other social entitlements. Still, labor regulations and social policy have similar effects on well-being. They restrict labor supply and compress wage distributions, redistributing income as a result. Historically, the labor compact is seen as a precursor to greater and direct state intervention. As such, it is useful to begin with an overview of the conventional treatment of globalization and the welfare state.
The dominant narrative explains the rise of the welfare state as a response to the dislocation resulting from industrialization. Before the extension and deepening of market forces, the story goes, workers and families could rely on the church, benevolent landowners, and local authorities to support them when they were without work, fell ill, or met some other hazard. But these institutions proved to be insufficient in the wake of the industrial revolution that brought with it new kinds of exposures and risks. These risks emanated from the creation of the factory systemits long hours of work, exploitation of children and women, and unsanitary conditionsand the concentration of industry in urban centers where workers found themselves cut off from customary social networks when they became ill, unemployed, or too old to work. Markets do not always provide adequate insurance for these outcomes, and state intervention was the logical response to the changing dynamic.
Karl Polanyi (1944, 250) is chief standard bearer of this approach. "The congenital weakness of nineteenth century society was not that it was industrial, but that it was a market society." But while Polanyi insisted that the market was inherently a social institution, his views have been recast in a fundamental dialectic that opposes markets and states. In the blunt words of Gøsta Esping-Andersen (1990, 157), the doyen of comparative social policy, the welfare state sought to "emancipate individuals from market dependence." The success of state intervention is conventionally measured in its ability to thwart and roll back the market.
The narrative is written as a chapter of national history in which domestic forces and actors, workers, employers, or the state, are forefront. Although disentangling the many explanations is bound to be unsatisfactoryand beyond my purposes, several strands of thought can be identified. A main thread is the struggle between classical liberalism and the modern state. For instance, the advent of French social policy was the outcome of a local "ideological struggle between the defenders of laissez-faire liberalism and the diverse forces of socialists, social Catholics, and solidarists, who favored varying levels of state intervention to promote the common welfare" (Dutton 2002, 5). In the power resources model, the spread of the franchise and the rise of organized labor are leading protagonists. In Britain, after 1900, the "new mass political culture" (Harris 1993, 193) influenced the direction of social legislation. Domestic affairs differed in North America and Australia, because the numbers of voters were initially higher and the process of democratization was not tied directly to a program of social reform. Comparative approaches in this vein have built on national histories, grouping countries, as in Esping-Andersen (1990), by the success or failure of labor to oppose capital and moderate workers' dependence on wage compensation.
The welfare state as the offspring of domestic forces is common currency. From an economic historian's perspective, Peter H. Lindert (2004) evaluated the determinants of social spending from 1880 until the present, the long twentieth century, for a large sample of poor and rich countries. He attributed the rise in spending to domestic forces: the growth in income, the expression of new political voices, and the aging of the population. In the U.S., while spending on education was considerable before 1914, the ratio of persons actually voting in the enfranchised population was lower than in Europe. Ever the optimist, Lindert concluded that the welfare state was not a European construct, since population movements and democratization have comparable effects on emerging economies today. Lindert's approach, like other comparative studies, juxtaposed national histories without entertaining their likely interdependence.
It is a puzzle that the main narrative has tended to downsize the impact of external or international forces on the rise of the welfare state. Polanyi (1944) himself devoted attention to the rise and fall of the period's gold standard. And trade was a staple of life, exactly in the decades that saw the rise of the labor compact. Jeffrey G. Williamson (1998, 2002, 2006) and coauthors (Hatton and Williamson 1998, 2005; O'Rourke and Williamson 1999; Taylor and Williamson 1997) have forcefully demonstrated the role of the great transport revolutions of the period in promoting the movement of labor, capital, and goods across Old and New Worlds. Table 1.1 gives the external exposure of a sample of countries. As distances were cut short, the trade content of GDP increased, by about 400 percent between 1870 and 1914 (Findlay and O'Rourke 2007, 412). It may well be that the simultaneous rise in the welfare state and in trade was mere coincidence. But this proposition is difficult to sustain. They were intertwined since both were related to structural changes in the economy and the rise in income.
To be fair, historians (Rodgers 1998) have remarked on the cross-border and trans-Atlantic exchanges of social policies. In the 1880s, Bismarck's compatriots criticized his reforms for being "too French" (Berger 2003, 78), while Lloyd George was full of praise for Germany's social programs after his visit in 1908, the year before he introduced unemployment insurance legislation in London (Hay 1977, 51). Still, the focus is squarely on the transnational movements of ideas, referred to as the "transfer of social technology" (Hennock 1987). The consequences for social policy of international flows of workers, goods, and capitalthe nuts and bolts of globalizationhave received less attention. And so has the fact that all social actors cared about the regulatory environment of their trading partners, which may have been perceived to provide them with seemingly unfair advantages. These forces would certainly have affected the design of the labor compact. The history of the welfare state has remained staunchly, almost triumphantly, national in scope and purpose. Even Peter Katzenstein (1985, 13334), whose body of research is devoted to the centrality of external pressures and opportunities on policy making, upheld 'the welfare state in one country' view: "Domestic compensation responds primarily to the logic of domestic politics; it is not a deliberate response to the logic of the international economy."
Other political scientists (Berman 2006; Silver 2003; see also Tilly 1995), motivated by the recent wave of globalization, have extended the fundamental dialectic to accommodate international integration. Nonetheless, they have retained the familiar trope of states versus markets in which globalization is construed as an added layer of risk and dislocation. But attitudes to domestic and international trade are not identical, because the challenges they pose are different. In autarky, the fate of social actors is tied to local demand and supply, but in an open economy global markets determine rewards for labor, land, and capital. This distinction gave pause to contemporaries. "It is no exaggeration," a British worker lamented, "to say that the wages of an English weaver may be determined by the conditions existing in Japanese mills." While the accuracy of this claim was and is controversial (Clark 1987), more unanimous was the observation that loose operating rules and regulations abroad were a source of unfair competition. Workers may have accepted similar discrepancies within their own borders, if only because they never appeared to be that large. Similarly, workers separated the effects on their livelihoods of internal migration and cross-border movements. The responses of labor, as well as those of business and states, to foreign and domestic challenges were therefore not always the same. For the key social actors, globalization was conceived as something more than and different from structural change in the domestic economy.
GLOBALIZATION BACKLASH: ONE SIZE FITS ALL?
In the Polanyi framework, the historical response to globalization was its rejection. Welfare states are perceived to be stronger in closed and isolated economies. Where globalization forces cannot be resisted, welfare states unravel in a race to the bottom. The adoption of social legislation, Polanyi (1944, 204) wrote, went hand in hand with trade protectionism. "Internal and external, social and national protectionism tended to fuse." The inference is that by 1914 states everywhere had successfully turned back competitive forces. Economic historians have offered support for this line of reasoning. In his classic study Paul Bairoch (1989) sought to document the rise of protectionism in the developed world from 1870 on. In the Old World, agrarian and industrial interests aligned to raise tariffs, and in the New, producers sought protection against manufacturing imports.
The backlash to globalization was ubiquitous, as if one size fits all. Immigration restrictions complemented tariff protection. The fall in transport costs had precipitated waves of immigration. From 1870 until the Great War, more than 50 million Europeans emigrated overseas and roughly a similar number moved elsewhere on the continent. In receiving countries, the complaint was that migrants put downward pressure on wages and increased employment insecurity (Hatton and Williamson 2005). Everywhere governments responded by placing restrictions on new arrivals.
The standard formulation is inadequate because there were alternatives (Adserà and Boix 2002). Tellingly, protectionism around 1900 was on the decline in Europe and parts of the Americas (Dormois 2009, 136); immigration restrictions were lax in the Old World and uneven in the New. More than enabling, globalization broke down existing political alliances and created a propitious environment for the emergence of new coalitions and policy experiments. For one, labor regulation was conceived to provide workers wage and employment security, without sacrificing the gains of trade. Labor would benefit from improved factory conditions and have their free trade 'loaf' too (Trentmann 2008). While the threat of rivals operating with inferior labor standards was real, the response was not necessarily closing doors to trade. To safeguard the labor compact, states had the option of convincing rivals to adopt more and tighter regulation in exchange for greater market access, a phenomenon David Vogel (1995) has appropriately termed "trading up." Of course, the adoption of labor regulation and free trade was more likely if labor was relatively abundant, where states were less dependent on custom duties as a revenue source, and when the alliance of labor and manufacturers came to dominate agricultural interests. But the upshot is that there were policy options to the backlash, the decisions to open markets and to implement redistributive programs being simultaneously determined and not mutually exclusive (Boix 2006).
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Table of Contents
1 The Virtuous Circle of Trade and the Labor Compact 1
Part 1 How Globalization Caused the Labor Compact
2 Challenge and Response 25
3 Markets and States in Old and New Worlds 49
4 International Labor Standards: Ideas or Trade Based? 65
Part 2 How the Labor Compact Made Globalization
5 Did the Labor Compact Reduce Inequality? 87
6 Did Labor Standards Harm or Benefit Trade? 117
7 The Labor Compact in the Long Twentieth Century 139
8 Vandervelde's Gift 160