The Paradox of Globalization

The Paradox of Globalization

Professor Dani Rodrik of Harvard University in his much celebrated book;  “The Globalization Paradox” writes that a delicate balance exists between democracy and processes of globalization. He notes that as different societies have different needs and preferences in terms of how they structure the institutions required to ensure markets function correctly, democratic pressures are likely to lead to a variety of different institutions across different territories. This diversity inhibits the global integration of markets by raising transaction costs across jurisdictions. Consequently, a world, which is fully responsive to democratic preferences, will be unable to achieve full globalization.

The argument in the book “The Globalization Paradox: Democracy and the Future of the World Economy” can be expressed in the form of a syllogism.

1.     Markets require a range of non-market institutions (of regulation, stabilization, legitimation) to work well and remain socially sustainable.

2.     These institutions do not take unique forms, in the sense that ultimate goals such as efficiency or stability can be achieved under a variety of designs

3.     Different societies, organized around their own states, have patently different needs and preferences regarding the shape that market-supporting institutions can take.

4.     A world that is sufficiently responsive to democratic preferences will therefore be one of institutional diversity and heterogeneity rather than institutional harmonization and convergence.

5.     Since institutional diversity inhibits the global integration of markets by raising transaction costs across jurisdictional boundaries, a world that is sufficiently responsive to democratic preferences will also be one that falls short of full globalization.

Perhaps the system of international tariffs and subsidies where countries compete with each other to outdo themselves on tariffs/subsidies in order to remain competitive in global trade is another example of the diversities that exist across countries and how it impedes free flow of trade. As per Professor Larry Summers, probably at this moment, the greatest threat to open market capitalism comes from state-driven mercantilism capitalism, often carried on by authoritarian governments. They do not seek a level playing field. They seek a playing field that is tilted in their favor through the use of a variety of kinds of subsidized credits. The best and most credible way of deterring and limiting that behavior is to have a capacity to respond so that it does not produce commercial advantages. That’s what the Ex-Im bank enables the United States to do. Quoting Professor Summers;

“There are some who believe that it is good for everybody globally to subsidize exports. I’m not among them. I’m in favor of negotiations that would move towards a system where you didn’t have every country racing to compete with subsidies. Countries should work together to bring about a more rules-based system.”

In an era of economic stagnation across the world, trade can be a key lever of growth. However instead of investing in subsidies to boost exports, investing in export promotion schemes and removal of barriers to private investment are important to achieving increased output and employment in the economy. Setting up of institutions like Ex-Im bank focused on trade promotion through negotiation instead of subsidies, is also a vital step towards promoting free and fair trade practices, which will benefit the trading partners in the long run.

Trade agenda is an agenda that is moving beyond the traditional areas of tariffs and quotas to cover all kinds of business practices and rules regarding business practices. That needs to be approached with great care. There is certainly a tendency for all business advocates of more favorable rules to put their agendas under the auspices of free trade. A classic area is the issue of IPR wherein excess care for IPR issues can stifle trade whereas over liberalization can undermine the ability to innovate as well as regulate. Hence a fair balance has to be struck which is possible only when the world sits down to negotiate a low trade barrier regime across nations.

The debate around trade and tariff reduction seldom turns into a debate of national interests. As a general principle, even in trade the idea of national treatment is fundamental. Countries should be permitted to make whatever judgment they want up to and including banning certain products or banning any particular commercial practice in their countries. But it is problematic when they make rules that treat domestic and foreign firms in substantially different ways. The agenda for trade negotiations should not be agenda of what type of economic or health and safety or environmental regulations are appropriate, but instead should be an agenda of non-discrimination that seeks to enable whatever rules countries desire, but asks only that they applied in fair-minded ways with respect to domestic and foreign firms. While it is well established that expanding Global trade can be key to exploiting the next round of global growth, Professor Kenneth Rogoff points out that large sustained external imbalances in trade are also something that global policymakers do need to monitor closely, because, as the US housing bust showed, they can be an indicator of problems that need to be investigated more deeply. Critics of the surplus countries are right that there are two sides to every balance, and those policies in both surplus and deficit countries should be subject to review.  Apart from purely fiscal and monetary considerations, there are also issues of ratification of International Human Rights regime as well as negotiating the next set of Environmental considerations. Professor Beth Simmons in his paper on International Human Rights Regime proves empirically that there are positive payoffs for ratification by countries in form of aid, increased trade as well as investment. Similarly Professor Jeffrey Frankel also argues for environmental policy underpinning trade.

In conclusion, while global trade has the potential to usher in the next wave of growth across the world but for that to happen, nations will have to come out of protectionist trade policies and will have to constructively engage to lower trade barriers and promote trade while at the same time agreeing on managing global concerns like environment sustainability and upholding human rights.