Monday, June 22, 2009

Dilemmas of globalization and governance

Last week I attended a lecture by Professor Dani Rodrik from Harvard University at the LSE. Rodrik is a political economist, who is deeply interested in the institutions that regulate and govern markets. His presentation (slides can be downloaded here) was a genuine attempt to come up with a way to build a more sustainable system of markets and institutions.

Why did we find ourselves in this crisis? Because of the absence of financial regulation and "global macro imbalances," which led to large current account surpluses in emerging markets like China and large deficits in the US and some other emerging markets, Rodrik said. Deep economic integration (in finance and trade) was not accompanied by the necessary rules, regulations and institutions on a global level. Admittedly a constructivist, Rodrik said brand new ideas could fill the vacuum created by the failure of conventional thinking. And he did his share of brainstorming - an effort which confronted challenges from a suspecting audience, but still managed to show some important inconsistencies in our thinking and conduct.

For example, labor, environmental, health and safety standards differ from one country to the other, but countries still import products from trading partners with a completely different set of rules and values. One might complain about the labor practices in factories supplying Primark stores, but imposing western standards on developing countries would deprive third-world workers of their comparative advantage. In fact, prevalent economic norms advocating free trade and denouncing currency manipulation and industrial policies already limit the policies available to developing countries.

Even the European Union, which hopes to narrow the differences between its member states by a strenuous and costly accession process, suffers from great resistance to attempts at deeper integration. Although member states adopted a common currency, they are wary of any kind of fiscal integration/redistribution between member states. Their slow and limited response to the crisis (and the most recent reluctance regarding supra-national financial supervision) are the latest examples.

Rodrik recognizes that wide differences between countries render global regulations, standards and fiscal safety nets unrealistic - and undesirable, too. He argues for a system which will allow countries to integrate as much as they want, and govern the relationship between those that are different. Countries opt-out when necessary, but they do so within a framework. A greater policy space (subsidies, industrial policy) is provided to developing nations. There's no single, universal truth, but a variety of norms that are most suitable for a variety of circumstances. Expectations and conduct are aligned by not only changing the conduct, but also adjusting expectations.

Rodrik gives the example of the safeguard clause in the WTO, which defines a set of rules under which it is possible to deviate from free trade. If there is a surge in imports, countries can impose restrictions on a non-discriminatory basis and provide compensation to their trade partners. Refreshingly, he says that segmentation in global financial markets may be a welcome price to pay for the preservation of national policies and regulations reflecting country differences.

The greatest challenge to Rodrik's framework is the question of legitimacy - do countries' policies really reflect their citizens' preferences? The professor himself admitted that his argument did not hold for undemocratic societies. But then there was the question, who is fully democratic? Members of the audience rightfully pointed out that even the American democracy is flawed in important ways, and large groups of Americans lose out.

Even then, I liked Rodrik's presentation, because it was realistic and idealistic at the same time. Even if the policies pursued by developing states do not reflect their citizens' preferences, who can say that the policies devised in the developed world will fit the developing world any better? In the former, country elites rule, in the latter, world elites.

However, it is important to avoid the legitimisation of undemocratic regimes in the meantime. Different policies may be acceptable for different levels of economic development, but I don't believe in different shades of democracy. When it comes to democracy and human rights, there should be absolute, universal norms. Country circumstances should not be an excuse to submit to oppression - they should only be the guide as how to best help bring about democracy.

A friend of mine says, power creates its truth. This is true on different levels, international, national, regional. That's why the dissemination of political power is so important. Maybe Americans got it right: Democracy and prosperity are ends in themselves. They just get the means wrong, because there is more than one way.


Anonymous said...

“The greatest challenge to Rodrik's framework is the question of legitimacy - do countries' policies really reflect their citizens' preferences?”
Of course it does not. Not purely because new entrants of EU are much less wealthy and less wealthier than old Europe but also they are considerably conservative, religious, unsurprisingly scared of strong government, not really into all this “voting thing” and they give hay fever like reaction to high taxes… just like the immigrants from Asia and Africa to Europe – similar to Americans. Are the “differences” between countries being somehow inflated? Whose policy is representing citizens’ preferences? When things are getting so composite it is going to take a lot of effort –even for developed world – to really represent their citizens’ preferences.


lightcapsule said...

I totally agree, the policy preferences of immigrants (or 'newcomers' in the case of the EU) often differ from that of the locals (or the 'core'), and they are usually not represented fairly. And when there's an economic downturn, they are the easiest targets. Rodrik's argument could maybe be replicated on a national level, allowing immigrants to enjoy certain exemptions in income taxes, for example? I think the UK had a special tax exemption scheme for immigrants planning to stay shorter than three years... But I wonder how politically feasible this would be. In any case, immigrants should have greater voice in politics.