Globalization

Don't Fear the Future

The global economy is disorienting, but full of opportunities, too.

By Gordon Brown

Newsweek International

June 19, 2006 issue - In the last year 1 million manufacturing jobs have been lost from America, Europe and Japan, and one quarter of a million service jobs gone offshore. For the first time Asia is outproducing Europe. And driven not just by political uncertainty but by the rising needs of Asia, oil and commodity prices have been rising fast.

These last 12 months have seen the biggest step change in the scale, speed and scope of what is already the biggest industrial and economic restructuring the world has ever seen. And we are seeing not just the ever-faster advance of globalization but of globalization's discontents, too. Last century's interwar years produced protectionist beggar-my-neighbor policies which only intensified the Depression and set nation against nation. Now, in 2006, protectionist forces are on the rise again: "economic patriotism" in Europe, populism in Latin America, anti-immigrant feeling and sullen resistance to change on just about every continent.

Take one example. The European single market aspires to be what it says it is—an open market allowing the free movement of goods, people and capital. But in the last few months, Europe has seen France seek to block Italian utility take-overs, Italy threaten Dutch banking acquisitions, Spain stall German energy bids and Poland resist Italian financial-service mergers. And today an ambitious world-trade deal seems even more elusive than ever, with rich-country protectionism criticized for standing in the way of poor countries' development.

The paradox of today's globalization is that even its winners feel themselves to be losers. Globalization is cutting the price of consumer goods from clothes to electronics, putting what were once luxury goods into the hands of millions of ordinary households. Cheaper products and sometimes services from newly emerging countries create the competition that spurs us on to greater productivity and innovation. And emerging markets are, in fact, expanding markets for us just as we are for them. U.S. and European company brands are emblems all over the world, and their global penetration, as much as homegrown entrepreneurship, is the key to our future success.

Isolationism, partial retreat and protectionism are self-defeating options. By attempting to shelter ourselves—to pick and choose which barriers we raise or lower—we will only fall behind, risk competitiveness and pay a higher price for long-run adjustment. Indeed, the whole success of the American economic experience teaches us that the lifeblood of a market economy is the continuous injection of new competition. It has been the hard work and enterprise of the American people, responding to the new opportunities brought by each successive wave of global economic change, that has been the foundation of American economic progress. And it is when America has shown that same commitment to leading the opening of markets in the rest of the world, such as the dismantling of trade barriers following the second world war, that the conditions are put in place for rising growth and prosperity for all.

So what is the best way of showing a doubting public today that protectionism is no answer to globalization and that, with the global sourcing of goods and services, the world can deliver a far more specialist division of labor and thus a far more efficient allocation of resources to the benefit of all? What will persuade skeptics more concerned about lost jobs that advanced industrial countries can find comparative advantage by moving up the value-added chain and that instead of sheltering our industries, we will all, in the end, benefit by improving their productivity?

It is clear that we need a global conversation about both the risks of protectionism and the benefits of globalization. We need to explain that the same globalization that results in the loss of old jobs can create new and better jobs. This conversation matters not just for governments but for business, in whose interests it is to show that the more restricted the flows of capital and the cross-border mergers and acquisitions, the smaller the global market.

Of course, up against this new global competition, each country's strengths—and potential comparative advantages—are different. In the case of Britain and Europe it will require a stronger entrepreneurial culture that encourages new ideas, support for innovation by helping with risk finance, and commercialization of technology that helps disseminate the ideas. And while there will be ever-growing pressure from China and India to compete for more high-skilled jobs, our best course is still to have the confidence to find our comparative advantage by investing in a more highly skilled work force that can respond quickly and flexibly to change. So a globalization that works will mean not only open markets and free trade and flexible labor conditions, but higher investment in innovation and education.

For Europe this also means escalating the pace of economic reform. For Britain in particular it means an emphasis on productivity—persuading people that while we may not be able to stop them losing the last job, we can do a great deal to help them be equipped for the next jobs. And it also means looking at new sources of jobs at home—not least from the environment. In Britain alone we believe we can create more than 100,000 jobs from energy conservation to microgeneration. If nations leave dislocated workers feeling hopeless and forgotten with only the offer of dead-end jobs, they will be increasing the chances that their citizens will fuel the fires of protectionism. But if we expand the opportunities for new skills and then new jobs, make that work pay and invest in strengthening communities, then citizens will be far more likely to see the larger benefits of globalization.

Throughout industrialization, we have been right to say that if people work hard, play by the rules and acquire skills, they will do well and the next generation can aspire to do even better than the last. It is now our task to demonstrate to those who lose jobs to the global economy not only that we are on their side, but that new and good opportunities will be available.

But globalization must mean something more than open markets, free trade and investment in innovation and education: it must also mean a level playing field. Everyone must become as open as each other. Our multilateral rules and institutions, though devised in another era for different challenges, must be made fit for an open, not closed, economy. That is why the IMF's new focus on surveillance —on monitoring both a level playing field and stability and growth risks—is so important. We must also recognize how quickly other countries' problems can become our problems too. Movements of people from poor to rich countries will speed up and extremists will be able to exploit weak states unless we help empower these poorer countries' economic and social development. Encouraging education for all—and removing obstacles to economic development—is, thus, not just a moral cause but a modern strategic and economic imperative.

The starting point—the most powerful anti-protectionist signal we can send—is breaking the world-trade deadlock. The prize is a 50 percent increase in world trade. And the key that will unlock that door is Europe and America offering progress by reducing protectionism in agriculture, and India and Brazil's being willing to respond with liberalization of services and greater market access. Europe should indicate that when it comes to review its budget and its agricultural policies, the essential element of both will be a radical reform of the Common Agricultural Policy and a timetable to end all forms of agricultural protectionism. What better signal could Europe send of its commitment to wider economic reform, to completing the single market and our willingness to rise to the challenges of globalization than a successful reform of agricultural protectionism? And what better signal could Europe and America send than action to break the deadlock in the wider world-trade talks as a demonstration of our determination to fight protectionism and our belief in globalization as a force for prosperity and fairness on a global scale?

The Rt. Hon. Gordon Brown is the United Kingdom's chancellor of the Exchequer.

© 2006 Newsweek, Inc.

Hurricanes and insurance risk

Are Hurricanes Uninsurable?

By HOLMAN W. JENKINS, JR. June 7, 2006; Page A15

It wasn't so long ago that insurers were pronouncing terrorism "uninsurable." But ask any insurer: Aon's Paul Bassett recently noted that the global war on terror had greatly reduced the threat of megaplots on the scale of Sept. 11, 2001.

Yes, suicide bombers and car bombs remain a threat, but not to the industry's capital base. Hurricanes are the new "uninsurable" now.

Here's a complicated story that only begins with warming ocean temperatures thought to justify an expectation of increased hurricanes. One risk modeler, Risk Management Solutions Inc., chucked out 100 years of hurricane data and brought together four climate scientists who probably wouldn't agree about much else but agreed that the next five years would see a higher-than-average number of hurricanes. Presto, a risk model employed by many insurers to set rates suddenly implies a 40% hike for Gulf Coast property owners.

A second factor: More hurricanes meet more people and property. Regionally speaking, Katrina came ashore in a low-rent neighborhood. Florida, a hurricane highway, represents an agglomeration of coastal property worth $2 trillion. New York City and Long Island offer a similar target. The Texas coast represents about $750 billion worth of bowling pins.

These scenic vicinities experienced building booms in the '70s and '80s, when hurricane activity was at low ebb. Beginning in the early 1990s, a series of devastating storms swept through, especially in Florida. Enter factor three: The willingness of the federal government to rush in with rebuilding aid far above even the billions in subsidized flood insurance already provided to coastal homeowners. Coastal development only quickened when it should have slowed.

Upping the ante were 9/11 and Katrina, which demonstrated to high rollers the federal government was incapable of not shelling out infinite sums to ease personal tragedies when bad things happen on a large scale (if you lose your house or loved one in an everyday mishap, of course, you're still on your own).

As anyone might have predicted, this dynamic is now unraveling the insurance industry's ability to help society control its risk-taking by properly pricing risk. Lloyd's Julian James put it this way late last year: "It seems to me that with $400,000 per family [paid out in the wake of the terrorist attacks and Katrina], if the government hands out checks, do people need insurance?"

In olden times, robber barons built their seaside mansions a safe distance from the ocean. Today's yuppies build their palaces right on the beach: FEMA reckons that a quarter of coastal dwellings will be destroyed in the next half century. The solution seems obvious: Restore the incentive for yuppies to behave responsibly like the robber barons.

This assumes two things: Insurers would have to be free to charge realistic rates, which is problematic given that rates in most states are approved by elected or appointed insurance commissioners, most of whom have their eyes on higher office.

It also assumes state courts will uphold insurance contracts -- a principle being tested in Mississippi, where Attorney General Jim Hood likens insurers to "Nazis in lockstep" and is pursuing civil and criminal complaints against them for refusing to pay for flood damage explicitly not covered in the policies they sold to homeowners.

The riskiest assumption of all is that property owners would be willing to pay "actuarially sound" rates rather than just skipping insurance and relying on a federal bailout in the wake of a big storm. Here's the real crux of the claim by some industry watchers that hurricanes have become effectively uninsurable.

In this camp is Robert Litan, a Brookings Institution economist who says bailouts have become politically mandatory and property owners expect them. So the only rational course now is to fund them in advance, with taxes borne mainly by those who benefit. Coming to a similar conclusion is Allstate CEO Ed Liddy, a one-man band who's been trying to drum up enthusiasm for a federal disaster insurance program.

He was a voice alone but lately has acquired allies in the form of State Farm and a few others. Mr. Liddy lays out an approach that, he claims, would tap all business and property owners in Florida who presumably benefit from coastal development even if their own property is inland. Folks in Peoria and Dubuque wouldn't be milked, as they are now, to subsidize the lifestyle of beach dwellers.

He also says his plan would mandate realistic insurance rates and impose damage mitigation measures to reduce the cost of hurricanes and discourage high-risk development.

Don't hold your breath for this part. Federal flood insurance was instituted in 1968 with the same good intentions -- to make property owners bear the cost of their own recurrent bailouts. Instead it became a subsidy to increased risk-taking. That program today is $21 billion in the hole, its shortfalls financed by taxpayers in Peoria and Dubuque.

Where's Al Gore when you need him? Mr. Liddy's plan may be a defensible concession to political realities, i.e., the inevitability of the federal government continuing to pay people to rebuild what storms knock down (see New Orleans). But it also makes an undesirable peace with over-development of coastal areas. The harder road of imposing market insurance rates on coastal property owners and ending taxpayer handouts would mean a lot of coastal development would come to a halt -- as it should.

In any case, all agree the debate won't be settled in an election year, and probably not until another hurricane forces the country to face up to how the rest of us have been taxed again and again to subsidize the high-risk lifestyles of those who plant themselves in the paths of hurricanes.

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