Colin Hay Globalization

1 An earlier version of this paper was presented as an inaugural lecture at the Uni-versity of Birmingham and as the keynote address at the opening conference of theGENIE Network, University of Cyprus. The work presented here arises out of recentlycompleted research on ‘Globalization, European Integration and the European SocialModel’, which formed part of the ESRC’s ‘One Europe or Several’ Research Pro-gramme (project grant L213252043). The author is indebted to Government and Oppo-sition’s referees and editors for their generous and perceptive comments on an earlieriteration.

Colin Hay

What’s Globalization Got to Do with It?Economic Interdependence and theFuture of European Welfare States1

A RECURRENT FEATURE OF THE POLITICS AND POLITICAL

economy of the advanced liberal democracies since the 1970s hasbeen the management and, in particular, the suppression of political expectations. The recent history of the advanced liberaldemocracies is one characterized by successive bouts of expectationsuppression. Arguably, this has much to do with declining levels of political identification, a worrying lack of political engage-ment (at least in formal politics) and, it seems, ever-diminishinglevels of electoral turnout. Whilst this is not exclusively an Anglophone phenomenon, it is clear that political parties in theEnglish-speaking world have demonstrated themselves particularlyadept in the dark art of downsizing what we can legitimately expectfrom government.

In the late 1970s it was through arguments about (political) ‘over-load’ and ‘ungovernability’ that expectations were diminished. If, inthe 1950s, we had never had it so good, by the late 1970s we hadbeen having it too good for too long. We had indulged ourselves inan orgy of unconstrained democratic choice. In the (representa-tively) condescending tones of Anthony King at the time, ‘the hungrysheep look up and reckon that they have at least a reasonable chance

© The Author 2006. Journal compilation © 2006 Government and Opposition Ltd Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 MainStreet, Malden, MA 02148, USA.

2 GOVERNMENT AND OPPOSITION

© The Author 2006. Journal compilation © 2006 Government and Opposition Ltd

of being fed’2 – so they bleat for more. A crisis point had beenreached as parties sanctioned ever-spiralling demands which theysought to appease in a pathologically undisciplined form of electoralcompetition in which the price of the average vote grew from oneelection to the next. As Michel Crozier explained in his contributionto the Trilateral Commission’s report on ‘the crisis of democracy’,‘the operation of the democratic process . . . appears to have gener-ated a breakdown of traditional means of social control, a de-legitimation of political and other forms of authority and an overload of demands on government, exceeding its capacity torespond’.3 The message was clear. Democracy would have to be scaled back in the interests of governability. It was not so much a crisis of democracy, then, as a crisis produced by too much demo-cracy. Twenty-five years on, it is not the overload thesis which is beingused to diminish our expectations but the globalization thesis; andit is with this latest process of expectation diminution that this paperis concerned.

Though there are obvious differences – overload was political andself-imposed, globalization (at least in this conception) is economicand externally generated – there are also clear parallels. In bothbouts of expectation suppression previously legitimate democraticdemands are (to be) subordinated to economic imperatives. Thegovernment’s task is not to do what we, ‘the hungry sheep’, want, butwhat the harsh realities of the economy dictate. The casualty in bothcases is democratic choice.

Yet, there is another parallel too. There was no evidence for theoverload thesis (the key determinant of voting behaviour at the timebeing the perceived health of the economy – not the extent to whichgovernments were prepared to sacrifice economic health for elec-toral self-interest); and, as will presently be argued, there is preciouslittle evidence for globalization as a logic of economic disciplineeither.

2 Anthony King, ‘Overload: Problems of Governing in the 1970s’, Political Studies,23: 2/3 (1975), pp. 284–96, 286.

3 M. Crozier, ‘Are European Democracies Becoming Ungovernable?’, in M.Crozier, S. Huntington and J. Watanuki, The Crisis of Democracy, New York, New YorkUniversity Press, 1975, p. 8.

WHAT’S GLOBALIZATION GOT TO DO WITH IT? 3


DEFINING GLOBALIZATION

Before turning to the reasons and the evidence for this bold claim,however, it is important to clarify the terms in which the debate isconducted. For, understandably perhaps, whether ‘globalization hasanything to do with it’ depends on what globalization is taken tomean.

The conception of globalization employed in what follows is, tobe fair, a relatively specific and exacting one; yet it is not, I wouldsuggest, an unreasonable one if the term is to have any analytical pre-cision and utility. It is, moreover, very similar to that advanced byDavid Held and his colleagues – who, nonetheless, reach very dif-ferent conclusions. For them, ‘globalization is a process (or set ofprocesses) that embodies a transformation in the spatial organisationof social relations and transactions, generating transcontinental orinter-regional flows and networks of activity, interaction and power’.4

My reason for following Held and his colleagues in differentiating so clearly between globalization and regionalization is simple: indebates about the future of the European welfare state, globalizationhas all too frequently been confused or conflated with Europeaniza-tion.5 European integration is not globalization, nor is it evidence ofglobalization. Similarly, the term globalization cannot simply betreated as a synonym for the openness of an economy. For this is toflatten the geography of globalization. If an economy becomes moreopen by trading an ever-growing share of its GDP, but with only oneor two countries, whilst its trade volume with other countries falls, then this is not globalization. To count as evidence of global-ization, the process under consideration must be genuinely global-izing (increasingly inter-regional and/or inter-continental incharacter).

Such a definition has a series of clear implications. First, global-ization is a descriptive and not an explanatory term – it is an outcomeof causal processes rather than a causal process in its own right.Second, whether globalization can be said to be occurring is an

4 D. Held, A. McGrew, D. Goldblatt and J. Perraton, Global Transformations, Cam-bridge, Polity Press, 1999.

5 P. A. Hall, ‘Organised Market Economies and Unemployment in Europe’, in N.Bormeo, ed., Unemployment in the New Europe, Cambridge, Cambridge University Press,2001, p. 68, n. 9.



empirical question, not one that can be resolved theoretically. And,finally, globalization is not an entity or thing. It is not a self-containedprocess with its own causal powers. It is, at best, a tendency to whichthere are (or are likely to be) counter-tendencies. And, in so far asthe tendencies win out, it is an outcome (something to be explainedrather than something which might explain).

The advantage of this definition over others is that it is relativelyprecise (certainly in comparison to the existing literature) and canbe operationalized empirically (as I hope to demonstrate). Whetheror not globalization is happening is now an empirical question; nota matter of judgement, faith or theory. This, I suggest, is particularlyimportant, for, presented – as it invariably is – as a self-contained andself-sustaining process, the term globalization obscures more than itilluminates, hiding genuinely causal processes. Moreover, deployedin this way it may threaten to become something of a self-fulfillingprophecy. It is to this potentially causal role for the idea of global-ization that I now turn.

THE CAUSAL SIGNIFICANCE OF IDEAS ABOUT GLOBALIZATION

Globalization has become a key lens through which policy makersview the context in which they find themselves. If this is accepted, itsuggests that the content of understandings of globalization is likelyto affect political conduct significantly, with consequent effects forpolitical outcomes.

Consider the issue of flexibility in the labour market. There is nowsomething of a policy makers’ consensus that flexibility is a goodthing and is most easily achieved through the removal of so-calledlabour-market rigidities. These rigidities include such things asemployment rights – the right to be consulted before being maderedundant, the right to compensation on the premature terminationof contract, the right to seek redress through an industrial tribunal,and so forth. Each of these rigidities, it is argued, makes it less likelythat an employer will take on labour in the first place and take onadditional labour in response to excess demand. Moreover, labour-market rigidities render employers less able to adapt to fluctuatingdemand in the market by shedding excess productive capacity. Con-sequently, flexible labour markets tend to be associated with shortemployment tenure.



Yet, for present purposes, the key point is that globalization is seento intensify the pressure for labour-market flexibility. The mechanismis simple. In a globally integrated market in which capital is moremobile than ever before (employers can more easily relocate theiractivities elsewhere), vicious competition between states ensues. Thisdrives governments – at pain of disinvestment and rising unemploy-ment – to remove any remaining labour-market rigidities. A ‘race tothe bottom’ is thereby established as states compete against oneanother to offer a more attractive environment for investment.

This has an all too familiar ring to it and it does have a certainintuitive plausibility. Yet this is despite, not because of, its corre-spondence to the empirical evidence – there being no statistically sig-nificant correlation between tight labour markets and capital flight,for instance.6 But, for now, this is not the key point. For the sad ironyis that if governments believe the thesis to be true (or, indeed, findit in their interests to present it as true) they will act in a mannerconsistent with its predictions. In so doing they will contributefurther to labour-market deregulation – whether they are right to doso or not. Note also that the argument is essentially the same if wesubstitute welfare retrenchment, corporate tax cuts or any other sug-gested outcome of globalization for labour-market flexibility. Inshort, though the globalization thesis predicts labour-market flexi-bility (amongst other things), the fact of labour-market flexibiliza-tion tells us no more than that the thesis is influential.

This is all very well as far as it goes. It certainly encourages us to lookrather more closely at the conduct of public officials and the ideasinfluencing that conduct, but it does not go far enough. It tells us tobe careful in assuming that globalization is an agent of labour-marketflexibilization, welfare-state retrenchment and so forth. It suggests, inother words, that our expectations may have been falsely diminished.But it does not in itself demonstrate that there is an alternative tolabour-market flexibilization, welfare retrenchment and the like.

6 W. N. Cooke and D. S. Noble, ‘Industrial Relations Systems and US ForeignDirect Investment Abroad’, British Journal of Industrial Relations, 36: 4 (1998), pp.581–609; D. Swank, ‘Social Democratic Welfare States in a Global Economy: Scandi-navia in Comparative Perspective’, in R. Geyer, C. Ingrebristen and J. Moses, eds, Glob-alisation, Europeanisation and the End of Scandinavian Social Democracy?, Basingstoke,Palgrave, 2000, pp. 83–138; D. Swank, Global Capital, Political Institutions and PolicyChange in Developed Welfare States, Cambridge, Cambridge University Press, 2002.



To make that second step we have to establish what exactly is goingon and to look more closely at the genuine constraints imposed bythe external context. This entails an analysis that focuses on morethan just ideas about globalization. We need to examine the mate-rial evidence. We need to assess whether globalization characterizeswell what is going on – and, if it does not, what does. It is to the evi-dence itself that we now turn.

Through mechanisms like labour-market flexibilization, welfareretrenchment and the intensification of tax competition betweenstates, the conventional wisdom predicts a simple convergencebetween European social models – on the most residual Anglo-USideal type. Globalization exposes all economies to common pres-sures; common inputs produce common (i.e. convergent) outcomes,establishing the ascendancy of the Anglo-US liberal model.

Yet, influential though this view remains, it is not as unquestionedas once it was. An alternative and increasingly influential accountpoints to a rather more complex process of ‘dual’ or ‘co-convergence’.This, it is suggested, reinforces the distinctiveness of liberal marketeconomies (the archetype is usually the USA) and coordinated marketeconomies (the archetype is usually Germany). Where there was asimple process of convergence on the liberal (or Anglo-US) model,there is now complex or dual convergence.7 In both accounts thedriving force is globalization. Both suggest a simple causal logic inwhich the developmental trajectory of European social models isdriven by globalization. Globalization, the independent variable, pro-duces convergence or co-convergence, the dependent variable.

In what follows, I reject both variants of the convergence thesis onempirical grounds. I argue, controversially perhaps, that there is littleevidence of convergence amongst European social models and that,although common trajectories can be identified, these have tended

7 P. A. Hall and D. Soskice, eds, Varieties of Capitalism: The Institutional Foundationsof Comparative Advantage, Oxford, Oxford University Press, 2001; G. Garrett, PartisanPolitics in the Global Economy, Cambridge, Cambridge University Press, 1998; G. Garrett,‘Shrinking States? Globalization and National Autonomy in the OECD’, Oxford Devel-opment Studies, 26: 1 (1998), pp. 71–98; T. Iversen, J. Pontusson and D. Soskice, eds,Unions, Employers and Central Banks: Macroeconomic Coordination and Institutional Changein Social Market Economies, Cambridge, Cambridge University Press, 2000; H. Kitschelt,P. Lange, G. Marks and J. D. Stephens, Continuity and Change in Contemporary Capital-ism, Cambridge, Cambridge University Press, 1999.



to be implemented more or less enthusiastically and at differentpaces to produce, if anything, divergent outcomes. Second, and noless controversially, I suggest that it is difficult to see globalization asthe principal agent determining the path on which European socialmodels are embarked, since the empirical evidence points if anythingto de-globalization rather than globalization.

Preliminaries aside, we can now turn directly to the empirical evidence.

THE EMPIRICAL EVIDENCE: CONVERGENCE, DIVERSITY ORDIVERGENCE OF OUTCOMES?

Consider first the dependent variable – the question of convergence.Space prevents an exhaustive survey of the available empirical evi-dence. Nonetheless, a variety of more or less complex metrics can beused to examine trends in European social models since the 1960s(conventionally the starting point for discussions of globalization).

Consider, first, social transfer payments (see Figure 1).These are, in essence, a measure of basic welfare expenditure. For

ease of comparison they are here standardized at 100 for 1960. Pre-cisely because these are standardized measures, they are bound toshow an initial divergence. Yet, the convergence thesis would lead usto expect that initial divergence to be checked considerably by the1980s and 1990s. It would predict, in short, an oval-shaped distribu-tion. The co-convergence thesis, by contrast, would predict theemergence of two clusters – one grouped around Germany, the othergrouped around the UK. Neither prediction bears any relationshipto the evidence. What is observed, instead, is that consistent pathsare mapped out from the 1960s, which social models continue tofollow for the most part to the present day. The wide initial variancein growth rates is sustained over time. This is not a story of sys-tematic welfare retrenchment, nor is it a story of the diminishing distinctiveness of regime types – which seem, if anything, to be rein-forced over time. Indeed, it is the Nordic welfare states that havegrown the most. Under globalization, it would seem, the most gen-erous welfare states have thrived. It might, at this point, be protestedthat these results are no more than a product of standardizing thedata with 1960 as 100. Yet, precisely the same inferences can be drawnif we re-present the data with 1980 as 100 (see Figure 2).



Second, we might consider the raw unstandardized data itself –i.e. social transfers expressed as a share of GDP. To aid the analysis,I here group welfare regimes in terms of the conventional three-foldclassification. The Nordic (or social democratic) regime type hererefers to Sweden, Denmark, Finland and Norway; the conservative orcontinental regime type refers to Germany, the Netherlands, Italy andFrance; and the liberal regime type to the UK and Ireland.

What the raw data reveals (see Figure 3), interestingly, is that it isonly relatively recently that the distinctiveness of the Nordic social

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Figure 1Social Transfers of EU Member States as a Percentage of GDP (1960 = 100)



democratic regime type (the most generous in terms of welfare pro-vision and, one might expect, the most exposed by virtue of global-ization as a consequence) has emerged. This, again, stands in sometension with the predictions of the existing literature. For, far frombeing associated with welfare retrenchment, it would seem, theperiod of (supposedly) most intensive globalization (the 1980s to thepresent day) has been associated with the emergence and consoli-dation – not the retrenchment – of the most generous welfare statesthe world has ever known. Turning more directly to the question ofconvergence, we might note that the standard deviation for social

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Figure 2Social Transfers of EU Member States as a Percentage of GDP (1980 = 100)



transfers (as a proportion of GDP) for these 10 cases rises over time,indicating divergence not convergence.

This is all very well as far as it goes and is sufficient in its own termsto do considerable damage to the prevailing orthodoxy. But, arguably,it omits one crucial factor. Thus far it has effectively been assumed thatdemand for welfare has been consistent over the period since the1960s. Yet this we know not to be the case. It may well be, then, that if we control for increased need we will find that European welfarestates have become less, not more, generous over time in real terms.Indeed, scaling for variations in demand in this way may even serve torehabilitate the convergence thesis. In short, increases in welfarespending may have failed to keep pace with increases in welfare need.It is important, then, to re-evaluate the convergence and co-convergence theses in the light of this possibility.

There are two ways of looking at the effective generosity of benefits. The first, and simplest, is to look at benefits themselves as

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Figure 3Social Transfers as a Percentage of GDP by Regime Type



a proportion of average take-home pay in each country over time.The second, to which we turn presently, is to construct an aggregateindex of welfare generosity.

Consider first the actual generosity of welfare benefits over time.Given limitations of space, data is here presented solely for the valueof unemployment benefits expressed as income replacement rates(the share of average income replaced by unemployment and asso-ciated benefits). Figure 4 displays trends in the OECD standardizedindex of replacement of earnings averaged over the first five years ofbenefit. It shows, surprisingly, convergence between regime typesuntil the late 1970s and subsequent divergence. Today, the Nordicregime type is the most generous; the conservative regime type thenext-most generous; and the liberal regime type the least generous

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Figure 4Unemployment Income Replacement Rates (OECD Standardized Index for

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(a reversal from the period prior to 1980). Again the standard devi-ation (of all 10 country cases) increases, revealing divergence, notconvergence. Clearly this does not resurrect the convergence thesis.

The second, and rather more involved, way to control for varia-tions in welfare need over time is to construct an (aggregate) indexof welfare generosity (see Table 1). This compares actual expendi-ture with what we would expect were consistent levels of generosityto have been maintained, but given exhibited variations in need ordemand. The index developed here is simple and captures only vari-ations in demand relating to two factors: (1) the proportion of thepopulation over 65; and (2) the proportion of the population regis-tered unemployed. The index is standardized at 100 for 1985. It iscrude, but nonetheless instructive – its results suggesting further difficulties for the convergence and co-convergence theses.

Given the crudeness of the index in assessing variations in demandand the problems of using official unemployment data, we shouldperhaps resist the temptation to conclude from this that welfare states with scores over 100 in 1995 have become more generous than they were in 1985, whilst those with scores below 100 havebecome less generous. The index almost certainly underestimates realincreases in demand arising from an ageing population (in assuming

Table 1Index of Welfare Generosity in 1995 Compared to 1985 (= 100)

Country (Rank Order) Index Regime Type

Denmark (1) 131 NordicNorway (2) 124 NordicFinland (3) 116 NordicUK (4) 115 AngloSweden (5) 113 NordicNetherlands (6) 102 ConservativeItaly (7) 94 ConservativeIreland (8) 94 AngloGermany (9) 92 ConservativeFrance (10) 90 Conservative

Computed by comparing level of actual expenditure to predictedexpenditure given consistent levels of generosity, scaling for share ofpopulation over 65 and numbers unemployed. Index of generosity =(actual expenditure/index of anticipated expenditure) ¥ 100.



an essentially linear function and in assuming no differentiation in thelevel of need amongst populations over 65). Nonetheless, the rankorderings are likely to be more robust and reliable. The evidence, suchcautionary remarks notwithstanding, certainly suggests that it is theNordic welfare states that have proved best able to sustain their(already high) levels of welfare generosity. This is the exact oppositeof the convergence thesis’ prediction. Indeed, the data suggest thatthese welfare states have, if anything, enhanced their level of generos-ity. The conservative welfare states, by contrast, would seem to havehad most difficulty in defending welfare generosity. The liberalregimes fall somewhere in between. In so far as there has beenretrenchment, then, it has been very unevenly distributed, reinforcingrather than diminishing existing diversity in welfare regime types.Once again, the convergence thesis is sadly exposed.

THE EMPIRICAL EVIDENCE: GLOBALIZATION OR REGIONALIZATION?

As this suggests, it is difficult to find evidence of the convergence thatthe globalization thesis predicts, or even of the co-convergence antic-ipated by the dual convergence thesis. So much for the dependentvariable; what about the independent variable?

As suggested already, much depends on the definition of global-ization. It is important from the outset that we distinguish betweenthe openness of an economy (the volume of external economic trans-actions in which it is engaged) and the extent to which it can be saidto be globalized (the extent to which such economic transactions are genuinely global in their reach). It is undoubtedly the case thatEuropean economies are, on average, more open than once theywere – the volume of external economic transactions in which theyare involved has increased significantly since the 1960s (and that isnot in dispute).

However, the geography of such economic relations has becomeever more selective. In short, European economies have experiencednot a globalization of their economic relations over the past 40 years,but a consistent and ongoing de-globalization. This parallels theprocess of Europeanization (or, perhaps more accurately, EU-ization). Again, a variety of rather different empirical indices can bepointed to.



Consider first the proportion of the workforce employed in competition-sensitive sectors of the economy and the ratio of competition-sensitive (or ‘exposed’) to competition-insensitive (or‘non-exposed’) employment. The evidence is unequivocal and may,on the face of it, seem surprising (see Figure 5). For each of the 10country cases considered, the ratio of employment in exposed (con-ventionally, ‘globalized’) to non-exposed (‘non-globalized’) sectorshas fallen consistently since the 1980s. This might seem like evidenceof de-globalization, in the sense that the employment prospects ofan ever-smaller proportion of the workforce are dependent uponcompetitive advantage in international/global markets. Yet weshould be wary of jumping hastily to such a conclusion. For the exhib-ited trend would, in fact, be the prediction of neo-Ricardian variantsof the globalization thesis, on the grounds that pressures for pro-ductivity gains (and hence labour-shedding) are likely to be mostintense in the most integrated (i.e. the most open and/or ‘global’)markets. It is, nonetheless, an interesting observation – albeit onethat is not decisive either way in evaluating the globalization thesis.

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Altogether more discriminating, in differentiating between evi-dence of globalization and regionalization are so-called gravitymodels.8

Within a gravity model, trade is assumed to be associated positivelywith the ‘size’ of the economies between which it is transacted(usually expressed in terms of their respective shares of global GDP)and to be associated negatively with the distance between them.Ceteris paribus, geographically proximate countries will trade morewith one another than those separated by great distances, just asthose economies which account for a substantial share of global GDPwill tend to trade more with one another than smaller economies.The basic model can be written as an equation of the following form:

Where Tij is the volume of trade between countries i and jGDPj/Pj is the GDP per capita of country jDij is the distance between country i and j

In an era of globalization, of course, we would expect the effect ofgeography to be weakened significantly by enhanced transportationand communications technologies.

Consequently, were we to plot trade flows between a specific (here,European) country and its trading partners (controlling for relativeGDP per capita) against the distance between these economies, wewould expect to see clear evidence of the diminishing significance ofgeography over time. Take logarithms of both axes and the slopegives a value for d, the coefficient of sensitivity of trade to distance,in the above equation. If trade volumes show any sensitivity to dis-tance, the coefficient will be negatively signed. A process of global-ization should see the numerical value of this coefficient fall overtime (plot 1-2-3), whilst any tendency for that coefficient to rise is evidence of de-globalization (plot 3-2-1) (see Figure 6).

Table 2 presents a summary of the values of d, the coefficient ofsensitivity of trade to distance for 1960, 1980 and 1998 for eleven

log log log log . . . .T a b GDP P c GDP P d Dij i i j j ij= + ( ) + ( ) - ( ) +

8 For a more extended analysis see C. Hay, ‘Common Trajectories, Variable Paces,Divergent Outcomes? Models of European Capitalism Under Conditions of ComplexEconomic Interdependence’, Review of International Political Economy, 11: 2 (2004), pp.231–62.



European economies. Of the 11 cases considered, only Finland showsany sign of globalization; all 10 of the others show a clear and con-sistent de-globalization. Moreover, in each case the fit of the modelto the data increases from 1960 to 1980 and from 1980 to 1998 (thegravity model accounts for a progressively greater share of the variance in the data). The implications of this are clear. In so far as

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Figure 6Gravity Models and Globalization

Table 2Coefficients of Sensitivity of Trade to Distance

1960 1980 1998 Trend

Denmark -0.47 -0.53 -0.68 De-globalizationFinland -0.70 -0.63 -0.60 GlobalizationFrance +0.74 -0.72 -0.76 De-globalization(West) Germany -0.30 -0.60 -0.68 De-globalizationHungary -0.72 -1.20 -1.28 De-globalizationIreland -0.45 -0.53 -0.55 De-globalizationItaly -0.50 -0.61 -0.72 De-globalizationNetherlands -0.28 -0.48 -0.60 De-globalizationNorway -0.53 -0.55 -1.06 De-globalizationSweden -0.65 -0.70 -0.75 De-globalizationUK -0.02 -0.20 -0.60 De-globalization



openness might be seen to expose European economies to selectivepressures, those pressures arise not from globalization per se (for theterm is an ever more inaccurate description of the trading relationsof such economies) but from the process of European economic integration.

Yet, sceptics might suggest, it is one thing to point to the de-globalization of European trading relations; it is another thing altogether to demonstrate the de-globalization of Europeaneconomies. Apart from anything else, we might well argue that, ifEuropean economies have not seen a globalization of their tradingrelations over the past four decades, this is because of the growth ofinter-regional foreign direct investment (FDI). Firms from outsideEurope build production sites within Europe rather than tradingover thousands of kilometres. Nissan does not ship cars to the European market from South-East Asia (generating trade) but assembles them in Sunderland (sourced from FDI). FDI is, inessence, a substitute for trade over distance. As a proposition it certainly deserves to be explored.

Again, however, the evidence is hardly comforting to proponentsof the globalization thesis. First, by far the greatest proportion of EU-bound FDI is sourced in Europe – and that figure is growing (a factorreinforced by, but not reducible to, the Asian financial crisis). Thesame is true of EU-sourced FDI – a high and increasing proportionof which is invested within the European economy.

The large amount of missing data, combined with the relativelyshort time frame over which good time series data is available, sug-gests the need for a slightly different mode of presentation to thegravity models used for trade. Here, a single log-log graph of the ratioof FDI volumes into Europe for 1998 and 1980 is plotted against distance (see Figure 7). If, as the globalization thesis would predict,economies are recipients of ever-larger flows of FDI from distant locations, we would expect a positive slope to the graph.

What this shows, however, is that the relative volume of FDIcoming from distance has fallen rather than risen since 1980. FDI,like trade, would appear to be more, not less, sensitive to distance.

Yet, once again, that expectation is simply not borne out by theempirical evidence. Once again, the trend would seem to be one ofde-globalization rather than globalization – a product of the ‘EU-ization’ of FDI.



NEITHER GLOBALIZATION NOR NEO-LIBERAL GLOBALIZATION,BUT NEO-LIBERALIZATION

The above evidence would certainly suggest strong empiricalgrounds for claiming that the convergence amongst European socialmodels widely assumed to be underway is simply not occurring.Moreover, the globalization widely assumed to be responsible for that convergence is also not occurring: if anything, EU-Europeaneconomies have experienced a de-globalization of their economicinterdependence in recent years. If it is the globalization thesis thatis responsible for our diminished political expectations, then thereare some grounds for optimism. Yet we should be careful about theprecise inferences we draw from this, for this is perhaps not quite asoptimistic a story as it might at first appear.

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Figure 7The De-globalization of European Inbound FDI, 1982–98



First, the absence of convergence does not mean that European welfare states are not embarked upon common tra-jectories. This is an important point. Political regimes implementingcommon policies are just as likely to diverge as they are to converge.Indeed, given institutional and ideational path dependencies, they are rather more likely to diverge than they are to converge – as,for instance, neo-liberalism may prove more difficult to embed in a regime previously characterized by the density of its social democratic institutions in comparison to one already characterizedby its liberalism. We cannot then conclude from the absence of clear evidence of convergence the absence of common reform trajectories.

Indeed, there is plenty of evidence of the latter. A pervasiveprocess of neo-liberalization is underway in Europe – reflected, forinstance, in greater welfare conditionalities, greater labour-marketflexibilization, a greater emphasis upon responsibilities rather thanrights, internal marketization processes and the increasing use ofprivate finance in public projects. This is, nonetheless, a process thatis proceeding at different paces in different contexts leading, so far,to divergent rather than convergent outcomes.

Second, we need to be equally careful in what we infer from theobservation that neo-liberalization has been pursued to date with thegreatest vigour in societies already characterized by the liberalism oftheir existing welfare regimes. For this should not blind us to theprospects of future convergence as the pace of neo-liberalization fallsin liberal regimes (as the process is, in some sense, exhausted) andthat in more traditionally inclusive and social democratic regimesquickens. The divergence precipitated by the differential imple-mentation of common policy precepts is likely, in time, to yield toconvergence.

What we can say, however, is that if this does occur, as well it might,there is no evidence at least here to link it with globalization. Theselective pressures that have been released by processes of economicintegration are more correctly attributed to European economicintegration on the one hand, and the specific institutional architec-ture of EMU on the other. That is the principal conclusion of thisarticle.

Yet, we should be wary of simply substituting EMU and Europeaneconomic integration for globalization as the independent variablesin generating a narrative about the inevitable imposition of (albeit



initially divergent) neo-liberalisms almost identical to that with whichwe began. For there is certainly no compelling evidence that theprocess of European economic integration itself imposes a neo-liberalizing dynamic. Indeed, if anything, the evidence would pointin the opposite direction with reassuringly resolute and positive cor-relations for EU-European economies between such things as levelsof inward FDI on the one hand, and state expenditure and welfaregenerosity as shares of GDP on the other.9

To what, then, might we attribute this neo-liberalization? Twopotential causal factors follow from the above analysis. The first ofthese is the deflationary bias enshrined at the heart of EMU by theMaastricht convergence criteria and now reflected in the letter (ifnot always in the implementation) of the Stability and Growth Pact.10

Though chosen, this driver of neo-liberalization has become institu-tionalized. Its character is not, however, as fixed or immutable as that attributed to globalization. Indeed, were Britain to join EMU,the Stability and Growth Pact would almost certainly have to be renegotiated (and softened).

The second factor, one introduced right at the start of this paper,is the very idea of globalization itself. As I have sought to demon-strate, the idea of globalization as a non-negotiable logic of economicdiscipline and compulsion may exert a powerful causal influenceirrespective of its empirical paucity as a thesis. In other words, theidea that globalization entails neo-liberalization has become some-thing of a self-fulfilling prophecy and, as such, an independent driverof neo-liberalization in contemporary Europe.

This suggests the importance of recasting the terms in whichmuch of the critically inspired consensus on globalization is couched.For the above analysis, and the empirical evidence on which it is con-structed, suggest that it is imperative that we differentiate very clearlybetween globalizing and neo-liberalizing dynamics. Globalizationdoes not entail neo-liberalization and, as I have sought to demon-strate, neo-liberalization need not feed off globalizing dynamics.Consequently the ‘neo-liberal globalization’ that many critics assume

9 Swank, ‘Social Democratic Welfare States’; Swank, Global Capital; see also L.Mosley, Global Capital and National Governments, Cambridge, Cambridge UniversityPress, 2003.

10 Hay, ‘Common Trajectories, Variable Paces’.



to be underway remains, at present, largely aspirational and rhetor-ical.11 As I have sought to demonstrate, neo-liberalism is associatedat present, certainly in Europe, with a process of economic integra-tion that is regionalizing rather than globalization; yet it is no lessneo-liberal for this.

CONCLUSION: THE US ‘MODEL’?

In conclusion we turn to the economic and social costs of neo-liberalism for contemporary European societies. Once these are considered, any optimism which might be prompted by the aboveanalysis is quickly tempered. For, arguably, there are good reasons tosuggest that it is neo-liberalism rather than social democracy thatshould be seen as the burden on competitiveness in an era of height-ened competition amongst nations. A brief empirical anecdote mayserve to underline the point.

The US economy is, invariably, presented as the model to be emu-lated, combining good economic performance with near full employ-ment. Yet, the seemingly impressive labour-market performance ofthe US economy arguably comes at a, rarely acknowledged, price.There is a significant trade-off between social spending and struc-tural inequality and, in turn, between equality and both crime andincarceration rate – as the data makes very clear (see Table 3).

But there is a final and rather ugly twist to this. If the rapid expan-sion of the penal system in the 1980s and 1990s is regarded as an intervention in the labour market and the incarcerated arecounted among the ranks of the unemployed, the US male joblessrate rises to a level above the European average for most of the period since 1975.12 It hardly needs to be pointed out thatincarceration on a per capita basis is rather more expensive than

11 On ‘neo-liberal globalization’ see, for instance, S. Gill, ed., Globalisation, Democ-ratisation and Multilaterialism, Basingstoke, Palgrave, 1997; and, for an important cri-tique from a rather different perspective, see S. Ashman, ‘Resistance to NeoliberalGlobalisation: A Case of Militant Particularism?’, Politics, 24: 2 (2004), pp. 143–53.

12 B. Western and K. Beckett, ‘How Unregulated is the US Labour Market? ThePenal System as a Labour Market Institution’, American Journal of Sociology, 10: 4 (1999),pp. 1030–60; see also M. Blyth, ‘Same As It Never Was: Temporality and Typology inthe Varieties of Capitalism’, Comparative European Politics, 1: 2 (2003), pp. 215–26.



unemployment benefit. More importantly, since the job prospects ofex-convicts are so significantly eroded that they invariably leaveprison to join the ranks of the long-term unemployed, the impres-sive employment performance of the US economy in the 1980s and1990s has, in fact, depended in large part on a high and increasingincarceration rate at an increasing cost to the US taxpayer. Arguably,then, this is a very expensive non-welfare state.

It is precisely such a regime that we are in the process of emulat-ing in contemporary Europe today. This would seem to have beenthe choice we have made; but, if there is any substance to the analy-sis presented in the preceding pages, then this is a choice we shouldstrongly resist. In so doing, we may first need to convince ourselvesthat globalization does indeed have nothing to do with it.

Table 3Incarceration Rates and Welfare Regime type

Incarceration Rate (per 0.1M) Regime Type

US 686 liberalUK 139 liberalGermany 96 conservativeItaly 95 conservativeNetherlands 93 conservativeIreland 86 liberalFrance 85 conservativeSweden 68 NordicDenmark 59 NordicFinland 59 NordicNorway 59 Nordic

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