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‘Choosing Openness’: Why haven’t we won the argument yet?

The case for openness is compelling, but also more nuanced than many proponents tend to make it.

Photo: Andrew Xu/Flickr
Photo: Andrew Xu/Flickr

Putting his economist hat on, Andrew Leigh's new Lowy Institute Paper revisits the case for Australia to still choose openness in an age of rising populism and proposes some ideas for how to do it better.

Around the world we see populism on the rise and globalisation in retreat. Among so-called 'globalists', there is a lament that the arguments for openness have failed to cut through with the general public and the policy battle must be continually fought.

Leigh's contribution is less to go over the arguments in favour (though he does cover them with flair and in an accessible way, which might help persuade detractors). Instead, it is to show where the headline argument doesn't necessarily hold up and to suggest ways to correct this.

In doing so, perhaps a more nuanced argument can be made, better policies put in place, and the kind of populist pressures that have emerged so forcefully in other countries avoided.

The basic arguments for globalisation are well-rehearsed. For trade openness, there is Ricardo's theory of comparative advantage. For openness to foreign capital, the need to fund investment and bring in new ways of doing things. For immigration, the ability to attract foreign skills and ideas and grow the workforce.

Underpinning all of this is the premise that the net gains are sufficiently large that the winners could (theoretically) compensate the losers and still be ahead. Many are also quick to point out that advances in technology are far more to blame than trade for the loss of manufacturing jobs in advanced economies.

So why doesn't this argument cut through?

One reason is that globalisation's proponents often downplayed the fact that there are indeed losers and adjustment costs involved and, unsurprisingly, this imbalance often carried over into the relative policy emphasis. Recent research has also shown that the costs are much deeper than many originally thought. Globalisation's losers were thus never sufficiently compensated.

In the wake of populist uprisings, this imbalance in thinking is slowly being corrected – though there is a long way to go to translate changed rhetoric into substantive policy changes, let alone landing on the right solutions. Australia, luckily, has done better in this area thanks to our strong and targeted social safety net, but taking better care of displaced older workers that, quite understandably, struggle to adjust is one gap Leigh rightly identifies.

A second reason is that while the distributive costs of openness were at least acknowledged, legitimate non-economic costs have too often been left out of the basic pro-globalisation analysis.

Foreign investment that makes housing unaffordable or sharply increases wealth inequality is clearly socially undesirable. Leigh notes that policy in Australia already directs the majority of foreign residential real estate investment into new housing stock, but a residual issue is that a large number of residential properties remain vacant and thus in net terms don't add to available supply.

Another area is the (temporary) effect of immigration on social cohesion. Leigh puts forward evidence that while immigration tends to make society more innovative, particularly due to the benefits of diversity, it also in the short run reduces our sense of community (in the long run, this effect dissipates as new migrants integrate and we effectively redefine our in-group).

Citing research based on how teams of people interact in solving problems, Leigh notes that 'those in diverse teams said that they felt socially uncomfortable and were less certain about their solution to the puzzle. Performance went up, but enjoyment went down'.

A third reason why there is continued doubt is that it actually isn't clear that some recent forms of globalisation are indeed in the national interest. While foreign investment is needed in aggregate, if certain investments carry security concerns (in critical infrastructure, for example) or lower tax revenue due to aggressive tax avoidance by multinationals (with the profits shipped overseas) this can sometimes muddy the cost-benefit analysis (though not necessarily overturn it). The rising influence of both China and foreign technology giants heighten these concerns.

Similarly, while the case for trade liberalisation is sound, the arguments for some of the other things that have been tacked on to trade negotiations, such as investor-state dispute settlement mechanisms and expanded intellectual property (IP) protection, are much less so. The former inhibits policy for little to no benefit (it was originally intended to help developing economies with weak legal systems attract foreign investment). Meanwhile, expanding IP rights further would hurt Australia as a net IP importer, and it's unclear whether it would actually enhance innovation rather than hurt it or simply increase monopoly profits for patent holders at the expense of everyone else.

None of this lends validation to the many misplaced arguments against openness, from fears about employment to emotional calls for Australian business icons and agricultural land to stay in local hands. The arguments about the significant net gains from openness in trade, investment, and migration still stand. But unbalanced policy rhetoric and practice don't help and neither does the automatic acceptance or advocacy for all forms of globalisation, when some may not actually pass the national interest test.

The case for openness is thus compelling, but also more nuanced than many proponents tend to make it. That makes winning the argument all the more difficult in an age where people seem to want simple and direct answers, are often flooded with bad information, and don't know who to trust.

Fortunately, there are few signs that Australians in general are actually disenchanted with globalisation. In fact, the latest Lowy Institute polling presents quite a sanguine picture. A reasonable majority of Australians think globalisation is mostly good, are in favour of free trade, think immigration is about right or if anything too low, and see China mostly as an economic partner rather than a military threat. Attitudes to foreign investment are the least positive, but still doesn't rank as a top concern.

How can this positive disposition be sustained and built upon? Since making a better case for openness is mostly about the nuances, Leigh perhaps unsurprisingly mostly suggests a series of sensible enough policy tweaks rather than a complete overhaul. The key lies in strengthening public confidence that decisions are indeed being taken in the national interest, that those who lose out will be properly helped to adjust, and that checks and balances exist and are working effectively.  

Leigh also points to two areas where much more ambition is needed: addressing Australia's stagnating educational quality and taking an experimental approach to facilitating greater social capital at the community level.

Success in these areas would do more than just manage the downsides of globalisation. It would make Australia both more productive and more socially resilient in a world which is being increasingly disrupted. And as we know, the reasons for this go well beyond globalisation, though it is often the scapegoat.

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