Globalisation Demands Better, More Effective, Governments: Jeffrey D. Sachs

October 3, 2011Marketsby Jeffrey D. Sachs

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Globalisation Demands Better, More Effective Governments: Jeffrey D. Sachs

Economic globalization has, of course, produced some large benefits for the world, though it has also created major problems that need to be addressed. These problems demand a similar global response, which must first be built from individual governments. For years, the world’s government has got it wrong: in order for governments to operate effectively, the role of government needs to be modernized, in line with the specific challenges posed by an interconnected world economy.

NEW YORK – We live in an era in which the most important forces affecting every economy are global, not local. What happens “abroad” – in China, India, and elsewhere – powerfully affects even an economy as large as the United States. 

Economic globalization has, of course, produced some large benefits for the world, including the rapid spread of advanced technologies such as the Internet and mobile telephony. It has also reduced poverty sharply in many emerging economies – indeed, for this reason alone, the world economy needs to remain open and interconnected.

Yet globalization has also created major problems that need to be addressed. First, it has increased the scope for tax evasion, owing to a rapid proliferation of tax havens around the world. Multinational companies have many more opportunities than before to dodge their fair and efficient share of taxation.

Moreover, globalization has created losers as well as winners. In high-income countries, notably the US, Europe, and Japan, the biggest losers are workers who lack the education to compete effectively with low-paid workers in developing countries. Hardest hit are workers in rich countries who lack a college education. Such workers have lost jobs by the millions. Those who have kept their jobs have seen their wages stagnate or decline.

Globalization has also fueled contagion. The 2008 financial crisis started on Wall Street, but quickly spread to the entire world, pointing to the need for global cooperation on banking and finance. Climate change, infectious diseases, terrorism, and other ills that can easily cross borders demand a similar global response.  

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What globalization requires, therefore, are smart government policies. Governments should promote high-quality education, to ensure that young people are prepared to face global competition. They should raise productivity by building modern infrastructure and promoting science and technology. And governments should cooperate globally to regulate those parts of the economy – notably finance and the environment – in which problems in one country can spill over to other parts of the world.

The need for highly effective government in the era of globalization is the key message of my new book, The Price of Civilization. Simply put, we need more government nowadays, not less. Yet the role of government also needs to be modernized, in line with the specific challenges posed by an interconnected world economy.

I wrote The Price of Civilization out of the conviction that the US government has failed to understand and respond to the challenges of globalization ever since it began to impact America’s economy in the 1970’s. Rather than respond to globalization with more government spending on education, infrastructure, and technology, Ronald Reagan won the presidency in 1980 by pledging to slash government spending and cut taxes.

For 30 years, the US has been going in the wrong direction, cutting the role of government in the domestic economy rather than promoting the investments needed to modernize the economy and workforce. The rich have benefited in the short run, by getting massive tax breaks. The poor have suffered from job losses and cuts in government services. Economic inequality has reached a high not seen since the Great Depression.

Related: The Cost & Politics of Economic Inequality

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These adverse trends have been exacerbated by domestic politics. The rich have used their wealth to strengthen their grip on power. They pay for the expensive campaigns of presidents and congressmen, so presidents and congressmen help the rich – often at the expense of the rest of society. The same syndrome – in which the rich have gained control of the political system (or strengthened their control of it) – now afflicts many other countries.