Globalization describes one of the central socio-economic phenomena of the last twenty years. It has led to the global economy becoming ever more interconnected: international trade in goods and services has been increasingly liberalized, capital and labor have become more mobile around the world. The rise of many emerging countries, in particular, has contributed to historically unprecedented growth in the global economy.

In the course of globalization, competitive positions, trade flows, and income distributions have shifted. Welfare state ideas have come under pressure and national politics has lost its influence in relation to international markets. In addition, the national economies are in very different phases of economic development and consequently compete on environmental and social standards. Thus, globalization in almost all economies and societies leads to severe pressure to adapt and triggers complex change processes.

The risks of contagion have increased due to the convergence of the markets, especially the international financial markets. Since the global financial crisis of 2008/09, the world has been in upheaval and on the threshold of a new global order. Geopolitical conflicts have broken out, the emerging countries are changing, developing countries are on the move and the “old industrialized countries” are facing a restructuring of their societies. The uncertainty about the future development of the world economy creates instability and volatility.

Develop strategies for business, politics and society

However, globalization does not end there; on the contrary, it is entering a new phase that will be associated with new opportunities, but also new risks and challenges for the economy, politics and society. The reorganization of the world economy, the technological structural change through digitization, access to resources as well as distribution issues, climate change and migration are among the central future topics of globalization.

Understanding globalization and its complex and interdependent processes and their consequences for business, politics and society is a central research question at the HWWI. The research area “Business cycle, world economy and international trade” analyzes the short and long-term developments in the world economy and derives specific options for action for companies and economic policy.

Economic forecast and economic policy analysis

For companies, households and politics, the economic development represents an important basis and a guide for their decisions. Companies align their production, households their consumption and politics their financial and fiscal policy decisions with the economic outlook. The HWWI creates its own economic forecasts based on models and analyzes the sectoral and macroeconomic effects of economic policy measures. Thanks to its expertise, the HWWI is one of the most sought-after economic research institutes in Germany among decision-makers in politics, business and the media.

World economy and international trade

Globalization and the growth of emerging countries have created new markets and international trade flows have changed in direction, scope and structure. Rapid change and the dynamism of the global economy mean both opportunities and risks at the same time. Established production sites and sales markets come under pressure and new ones emerge.

The HWWI analyzes the determinants of international trade and trends in global markets. Here, supply and demand-side factors such as population and income development, infrastructure and institutions play a central role. Medium to long-term developments can be shown on the basis of data and models as well as with the help of scenario analyzes. From this, change processes and options for action can be derived consistently, which enable decision-makers in business and politics to react in good time to opportunities and risks.

Europe in crisis

Europe has been considerably weakened economically, politically and institutionally by the crisis. The causes of the crisis are fundamental: Since a political union does not exist alongside the monetary union, the euro zone, as a non-optimal currency area, is systemically prone to crises. The European Central Bank is currently taking on the stabilization function. With its monetary policy, however, it is on the edge of its mandate. Against this background, it is important to analyze the institutional prerequisites and the political options for the future of an economically stable monetary union.

The new global order

The global financial crisis represents a deep turning point in globalization. The world economy is on the threshold of a new order. What this will look like is uncertain in view of the current geopolitical crises. In addition, there are developments such as digitization, the struggle for resources, global distribution conflicts and migration against the background of poverty and natural disasters. It is important to analyze the fundamental relationships and developments with regard to the main features of a new global regulatory framework for the world economy.

At the same time, however, there seems to be considerable scope for divergence within the tendency towards convergence around a market-liberal realignment of politics. If one compares the states of Western Europe, for example, one can easily see clear differences in labor market, tax and welfare policy. A comparison of American politics with that of continental European states also illustrates the continuing national scope for action in the age of globalization. The trade barriers in Europe (for example in agriculture) and in the USA (for example with steel) show that the pressure from lobby groups can still be stronger than the liberalization incentives of globalization. States do not have to adapt to globalization if they do not want to. However, such a policy has its price

Weakened state?

One of the most frequent arguments in the globalization debate sees the state as doubly weakened: Due to the increased competitive pressure, the state must firstly reduce taxes and thus benefits in the welfare system and secondly reduce social and environmental standards. Both theses can now be refuted empirically. With regard to access to the financial resources of society, the share of the state has not only not decreased in the last few decades, but even increased: among the G-7 states, the state share of the gross national product (government receipts) fell between 1990 and 2000 only in Japan, while it rose in all other countries.4 Another argument against the thesis of a reduction in taxes and the state share as a result of foreign trade openness is that that in Europe it was precisely the states with the greatest openness that were also those with the highest taxes and the highest state share in GNP. Denmark and Sweden are prime examples. They have a high share of foreign trade as well as a high share of the state in GNP. In principle, global (financial) markets do not react negatively to the level of government revenue from the national product, but to budget deficits, as these can have an inflationary effect

The decisive factor for the competitiveness of a location is not the amount of government income and expenditure, but their quality. It is not about the question of a “more” or “less” state, but about a “different” state. The reforms of the welfare systems in Sweden, the Netherlands, and Denmark are good examples of how welfare and competitiveness can be reconciled: more flexibility in the labor market and personal responsibility for the recipients of transfer payments do not have to mean a reduction in the quality of state benefits In Germany, on the other hand, there seems to be a conviction that competitiveness and the welfare state are mutually exclusive. In addition, there is more discussion here in Germany about the scope of the welfare state than about its qualitative realignment. In any case, openness to foreign trade does not stand in the way of a high government quota per se.

The second part of the thesis of the weakened state cannot be confirmed empirically either: as a result of increasing foreign trade integration, there was no dismantling of environmental and social standards in industrialized countries. A “race to the bottom” as a result of increased competition with countries with lower standards cannot be observed. However, there are a number of examples of a tightening of such standards - not least the ecological tax in Germany. Multilateral anchoring of such standards has also been one of the central issues in the WTO negotiations since Seattle. In regional agreements such as the EU and NAFTA, environmental and social standards have already been anchored multilaterally and stimulate an increase in the less developed member states.

The state is therefore not weakened per se. Rather, globalization is changing the framework for economic policy options by increasing the incentives for liberal market reforms and the costs of interventionist politics through increased competition for mobile resources. In this respect, the autonomy of governments to pursue a policy that ignores the expectations of global markets is restricted. However, this is not synonymous with the weakening of basic state functions, such as ensuring growth and prosperity. Only if the state is defined exclusively as an interventionist, e.g. neo-Keynesian state, can the thesis of weakening be maintained: In fact, cross-border mobility limits the effectiveness of “deficit spending” and increases the locational disadvantages of intervention and rigid regulation. If, on the other hand, one defines the state as responsible for the political framework conditions for economic prosperity, then by using the growth dynamics of globalization through a social market economy it can even better assume its responsibility and would thus be strengthened.

Free trade

Free trade would have a positive effect on the economy as a whole, as it would enable a more efficient allocation of resources through competition, mobility, and innovation and thus allow the production of goods and services where they can be produced most cheaply. The use of comparative cost advantages through free trade increases the prosperity of society as a whole. Mind you, it is primarily about cost advantages in comparison between products (only secondarily between countries) and about specializing in those products that can be manufactured most cheaply at the respective location.9 What trade theory has long postulated can be seen as positive Correlation between foreign trade openness and increased prosperity can be observed in many empirical examples.

Despite enormous differences in development, the opening of the then EC to the Iberian Peninsula did not lead to the impoverishment of Portugal and Spain or to a decline in prosperity in the more industrialized member states. This is only partly due to the so-called static gains from free trade that result from more efficient resource allocation and specialization. In addition, there are dynamic profits that are more important in the long term through competition and production in larger quantities, which enable lower prices and thus higher purchasing power through mass production.

These positive effects of trade occur with regional economic integration and global liberalization. However, the positive effects are only noticeable in the long term and for the economy as a whole, while the adjustment costs of free trade are felt in the short term and on a sector-specific basis. Therefore, the resistance of those who have to bear adjustment costs is faster and more precise than the support of the general public for liberalization. This is the core dilemma of current trade policy in many developed countries. In order to satisfy short-term lobbying interests for reasons of election tactics, governments repeatedly resort to protectionist measures instead of promoting liberalization that is meaningful in the long term. The solution to this dilemma lies in the fine-tuning between liberalization and the welfare state, which not only do not contradict one another but can also promote one another. If welfare state benefits are targeted and made compulsory for recipients to cushion adjustment costs through retraining and mobility, then trade liberalization can also be an opportunity for employees of non-competitive companies in the medium term.

As with any structural change, the welfare state also has an important function in trade liberalization: Compensation for those who are “injured” in the short term expresses social solidarity and reduces opposition to liberalization. This compensation must, however, be aimed at helping with reintegration into future-oriented professions in order to have an impact. Firstly, this means that not just transfer payments, but, for example, financial support for retraining and/or temporary wage subsidies for new jobs. Second, recipients of government support should also be expected to show solidarity with society in the form of geographical and professional mobility.

In North-South relations, an expansion of adaptation aid would promote further liberalization in developing countries. However, this support must be linked to good governance conditions so that it does not fizzle out in the privilege of individual groups. While free trade increases macroeconomic prosperity, its distribution is essentially a function of national political systems and structures.

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