Economic liberalization depends on strong states

Julia Cagé and Lucie Gadenne find that

tariff cuts lead to lower tax revenues as a share of GDP. The drop is highest in poor countries that don’t have the capacity to compensate for lost tariff revenues with domestic taxes.

This is an important point in itself, and illustrates a more general principle that many of the benefits of economic liberalization depend on strong states. For instance:

Free international capital flows put states’ capacities at financial regulation to a strong test. We’re living in a world where most have failed that test.

Free international capital flows also make it easy for tax evaders / corrupt officials / criminal enterprises / members of the 1% (these categories are not mutually exclusive) to hide money from tax authorities. This wouldn’t be a problem with stronger state institutions – reciprocal requirements that foreign banks automatically provide every depositor’s home tax authority with full information about deposits, and national tax authorities with the capability to deal with all this information.

Similarly, labor market liberalization: job security – the high cost of firing somebody that is supposed to render labor markets sclerotic – often serves to relieve the state of some responsibility for social insurance. The public social safety net in countries with strong job security – Greece, Italy, Spain, and Japan, for instance – is often quite weak. Denmark, on the other hand, has weak job security but a very strong safety net – terrific income support and, in particular, training for anybody who loses a job. The USA has weak job security but also a minimal safety net for the unemployed, and that’s one of the main reasons inequality is so much greater in the USA. It takes not only a strong, competent state to do what Denmark does, and also a particular constitutional setup to make credible the promise that the safety net won’t be yanked away. If you want more on that argument, see the works of Margarita Estevez-Abe, Torben Iversen, and David Soskice, or my work with Andrea Filippetti. But for now, just ask yourself – which step is easier, for Spain to “liberalize” its labor market (doing away with job security), or for it to develop a strong and credible state like Denmark’s? Well, obviously, watch out for that second step, it’s pretty big. So maybe they should just take the first step, liberalize labor markets without the safety net? That’s a nice solution if they think they can play with the US and UK in the global markets for intellectual property, financial services, and weapons (hint: they can’t) – activities in which those economies can be competitive on the strength of a relatively small skilled elite.

And, of course, the same goes for competition in product markets. It’s easy to privatize utilities or railways or control of the internet, but much harder to avoid regulatory capture in order to maintain rules which prevent corporations from making these into cartels that can be as bad, or worse, than the old sclerotic state control.

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