Why has globalization contributed to wage stagnation

What does the one-sided export orientation bring?

In many economic policy debates, the belief emerges that economic success can be equated with growth in exports. That is why the export orientation should be strengthened - if necessary against the economic interests of the majority. However, this “logic” only works as long as economic relationships are disregarded. For a well-functioning economy, overall economic demand is decisive, not just exports. Since in 2016 almost 9 out of 10 euros were earned in the EU internal market and only a good 1 euro in exports, a coordinated increase in domestic demand would be much more worthwhile than a one-eyed export orientation.

For a quarter of a century the mantra of increasing competitiveness has been preached in economic policy. Probably the most important starting point was the EU Commission's White Paper “Growth, Competitiveness, Employment”, which was supposed to show ways of halving unemployment, which had risen to a record level at the time, by 2000 as a result of the 1992/93 recession. In the White Paper, international competitiveness was discursively anchored for the first time as an essential economic policy goal, even if the proposals themselves were still relatively balanced compared to the current debate: Even then, the EU Commission addressed the dismantling of workers' rights and wage restraint as supposedly cost-saving - and thus export promotion measures; At the same time, however, she also warned of the associated political, economic and social problems.

In the following years, the new focus was actually accompanied by a progressive redistribution from wage income to profit income. In 2000 there was a further strengthening of the export orientation when the transformation of the EU into the most competitive economic area in the world was proclaimed as the top medium-term political goal. To make matters worse, an increase in competitiveness is being propagated as the ultimate in coping with the consequences of the financial and economic crisis.

Export orientation as a "dangerous obsession"

The basic problem of the policy of competition and export orientation is the transfer of corporate logics to entire nation states. As early as 1994, the now Nobel laureate in economics, Paul Krugman, criticized the EU Commission's White Paper and argued that not nations, but only companies in specific markets are in economic competition. “Competitiveness” as an economic policy concept to combat weak growth and employment represents a “dangerous obsession” which leads to false conclusions. Rather, the focus of economic policy should be on the development of the material standard of living (or, more broadly, prosperity), which depends above all on how much is produced - whether the products are then sold domestically or abroad is secondary.

The prevailing narrowing of discussions about “the” globalization contributes to the assumption that exports are already the main category of demand. This assumption is apparently confirmed by shortened statements such as "six out of ten euros are earned [in Austria] in exports". That this abbreviation follows an absurd "logic" is shown by the example of Luxembourg, which would even earn more than 2 out of 1 euro in export. There is of course no such miraculous increase in money. However, it is the result of combining the most common export quota - exports as a percentage of GDP - with common sense (GDP / economic output = "economic earnings"). However, this overlooks the fact that it is not exports as a whole but only the balance of exports and imports that is included in GDP. The GDP export quota is therefore not meaningful and could also be increased by importing the same good and immediately exporting it again at the same price.

In Austria, two out of three euros are earned on the home market

How much is economically "earned", ie how high the domestic value added share in exports is, is unfortunately not regularly recorded. However, it is relatively easy to calculate the share of exported goods and services in overall economic demand, which in addition to exports also includes domestic consumption and domestic investment. If one now looks at these real quotas, it is difficult to understand why domestic demand receives far less attention than exports in the economic policy debate:

In Austria, 6 out of 10 euros are not earned in exports - only every third euro is earned abroad (of which more than two thirds go to other EU countries - especially Germany). This is more than in most of the other members of the euro area, but less than in Belgium and the Netherlands; And significantly less than in the case of the Irish economy, whose data - distorted by their existence as a tax swamp - only partially reflect actual economic activity.

The potential of demand-driven economic policy in the EU

The one-sided export orientation is even more illogical for European economic policy. Since the majority of exports in all EU member states go to other EU states, the EU's overall export quota is much lower than in the individual member states (even if it has increased by around half compared to the turn of the millennium). In 2016, 88.9% of the total demand for European goods and services came from the EU itself - and thus only 11.1% from third countries. (However, it will rise more sharply with Brexit, which will create one of the most important new third country export markets.)

This low external dependency shows the enormous political potential of the EU internal market. If the individual nation states are no longer addressed as competitors in international competition who are subject to the global rules of the game, new design possibilities arise through cooperation with similar interests.

This applies both to the member states as a whole and to the majority of the inhabitants who make up these states: for employees, but even more so for the vast majority of small businesses that may still be able to do business across borders but are overwhelmed with transcontinental business. Both groups would benefit from increased purchasing power through higher wages. A somewhat weaker employment trend in the export sector would then be expected, but this should be overcompensated by the stronger demand in the domestic market-oriented sector - with higher incomes for everyone.

To date, however, this potential for economic policy has not been used enough. One of the reasons is the lobbying or better organization of globally oriented transnational corporations at the European level, which is partly structural (more funds, fewer companies and more homogeneous interests). For them, an export-oriented approach makes sense. In particular when economic liberal forces dominate both in the Council and in Parliament, the EU Commission is susceptible to a strong export orientation, even if it is only in the interests of the many to a limited extent. A look back at the economic policy of 2011-2013 shows where this is leading, when domestic demand was deliberately weakened in favor of better export opportunities by means of austerity policies and wage policy interventionism in the periphery:

In the years after the severe recession in 2008/09, it was indeed possible to achieve above-average growth contributions (compared to the pre-crisis period 2000-2007) in foreign trade (including intra-euro zone exports), but only at the price of weak to shrinking domestic demand. Overall, this resulted in another recession in 2012/13, with correspondingly higher unemployment and losses in disposable income. Only after the trend reversal in budget policy and a wage development that was still weak but at least better in real terms was it possible to return to growth rates as before the crisis from 2015 onwards.

Conclusion: Prosperity rather than export orientation required

Instead of the one-sided export orientation, a more active control of the overall demand is required - in particular by means of expansive budget (e.g. golden investment rule) and wage policy (e.g. EGB campaign “Europe needs a payrise”). This promotion of demand should be embedded in a broader concept of an orientation towards prosperity - anchored in the European treaties as an overarching economic policy objective. The crisis has shown that social and economic policy convergence and stable prosperity-oriented development are not a matter of course, but require active social and economic policy coordination and a European social union.

Since the EU is the group with the greatest demand in the world, it is far from being powerless at the mercy of increased international competitive pressure; rather, it could become the main actor in the progressive shaping of globalization. The international struggle to ensure adequate tax payments by multinational corporations and multimillionaires would currently offer itself as an initial project.