Martin Wolf spoke to the Luxembourg Oxford Society (who graciously invited Cambridge grads as well) on globalisation and the Rhineland model.

The Chief Economist at the EIB said in his introductory speech that he reads Martin Wolf, guest speaker to the Luxembourg Oxford Society, and Associate Editor, and Chief Economics Commentator for the Financial Times, every Wednesday, and that Wolf"s book, Why Globalisation Works is "one of three or four books on the subject that merit a read'. He isn't alone. Wolf is a star of economic journalism.

Globalisation gets people excited - they love it or hate it. Wolf spoke on its impact on the Rhineland model (Aus./ Bel./Fr./Ger./Lux.), one of four proposed western European economic models (Nordic, Anglo-Saxon, Mediterranean and Rhineland). Whether you are for or against, Wolf warns, globalisation is occurring anyway. In his view, Rhineland's problems stem not from globalisation but from other factors.

Wolf pinpoints the reforms in China in 1978 as the moment the world started going global. The shift of succession economies to the market kick started global trade, pushed forward by "the liberalisation of transactions at the border", amongst other factors. The result? Capital flows freely and seeks the highest return. It"s possible to move the labour intensive bits from rich countries to poor, and the same can be said of services. As Wolf puts it, "those bits that can be turned into bits" can be moved exactly as with goods.

Consequently, exports are growing faster than world GDP. "There is almost no country that has not seen a ratio of trade vs. GDP growth of at least 50%". And one of the prime criticisms from anti-globalisation protesters - the net flows all go back to a few rich countries. Rhineland countries have done very well in this circumstance.

Wolf says there are three things that globalisation brings to the world party. New competitors, who cause a profound difference in relative prices. The large change in prices causes changes in economies, which causes a change in the distribution of wages in countries. Some productivity becomes mobile.

Get innovative

What does this mean for the Rhineland Model' Wolf says that if new products from foreign countries are compatible with your country"s, globalisation is good. If they are competitive, it"s bad. Say for example Luxembourg imports labour intensive goods from a country and exports high-end innovation and services. When a third country comes in with even cheaper labour intensive goods, we are even better off, but the country that used to provide is worse off. "Rhineland countries are complementary with China. By God, China wants to buy the things that Rhineland countries produce", Wolf says.

A prime worry for Rhineland governments is that they will lose out on tax revenues (surprise!). Wolf doesn't see it happening. "The tax issue is a regulatory issue. Neither the evidence, nor the theory, proposes a collapse in tax revenue or corporation tax. Corporations are quite attached to their residences for a variety of reasons". Wolf says, "The jurisdictions that countries provide are attractive to wealthy people who can be taxed'.

The problems Wolf sees in Rhineland economies - such as low productivity, a lack of wholesale distribution, our failure to grow new, large companies - he doesn't blame on globalisation. Other concerns are our relatively low employment and high unemployment, and slow response to inflation changes.

So what does Wolf think we can do to improve? First, get rid of the double protection in the labour market: regulations, restrictions, insurances, and constrictions towards changes in technology. "Get innovative", he says. "Look at America. Germany has lost its historic position as innovation leader". An improvement we could make is to "become a magnet for the most attractive profiles and to develop more higher education'. Another problem is our inability to create new, large, innovative companies due to a lack of universities and the lack of a "U.S. - type network". He calls for more flexible markets and more R&D. There are important sectors where he feels we are losing out, such as the pharmaceutical industry.

In short, he concluded, we should "go Nordic".