the globalization paradox

Rodrick , 2011

By : Mario Thanasi

The Trilemma of World Economy

Hyperglobalization and the Nation State

Hyperglobalization

Nation State Democratic Politics

“Golden Straitjacket

Hyperglobalization and the Nation State

Washington Consensus or as Thomas Friedman refers “The Golden Straitjacket”

It argues that :⇒ Government would pursue policies that they believe will earn them market confidence and attract trade and

capital inflows: Tight money , small government , low taxes , flexible labor market , deregulation , privatization and

openness all around. It evokes the area of the Gold standard before World War.

⇒ Shrinking government and social safety nets to balance public budgets, keeping wages low to minimize

inflationary pressure , privatizing all public assets and putting them into play in the global security market ,

deregulating commerce to give free reign to market forces , eliminating tariffs and quotas to allow goods to move

freely across your border , giving priority to export production , and opening everything to foreign ownership. This

would give free reign to what Friedman has called “Electronic herd “.

⇒ Domestic economies free from economic and social obligations, were free to pursue an agenda that focused

exclusively on strict monetary rules and in the other hand the Electronic herd (the high-rolling financial speculator )

will run your way and drop billions of higher leveraged dollars into your economy”

“The Golden Straitjacket”

⇒ Electronic herd is made from 2 sorts of Groups (Cattle)1. The Short-Horn Cattle: Investors who buy stocks, bonds, future contracts, currencies, derivatives, options, and hedge funds.2.The Long-Horn Cattle: Multinational corporations that engage in direct foreign investment by building factories and utilities and supporting local corporations in so-called "strategic alliances" and "local partnerships."

Consequences of the Electronic herd ⇒-Inequality , Environmental destruction , Jobless-Economic security and loss in community and cultural identity.

“Think as participating in the Global economy today like driving a Formula race car, which gets faster and faster every year.Someone is always going to run into a wall and crashing, especially when you have drivers who only few years ago were riding a donkey” Thomas Friedman

⇒ Creative destruction of Capitalism

Different Perspective on Friedman's Theorya)Pro-globalization movement : Views the adoption of these policies as morally responsible because the increase in income tends to improve the standard of life for citizens as does the concomitant human rights and open government laws necessary in a liberal democracy.b) Environmentalists :worry that the policies don't leave room for local conservation and protective action ==>Nafta and South Empowerment Movement.c)Nationalism : See it as a surrender (Brexit ??)d)Trade unions : Resist the competitive effects of lowered tariffs and other reduced barriers to entry (outsourcing)

“Golden Straitjacket” Examples

Argentina cases 1998-2002

Argentina case study I

(I) Situation in Early 1990s

-Hyperinflation and a crushing debt burden

-Incomes had shrunk by 25%

-Private investment were on private stand still

-20000% annual hyperinflation

“It became cheaper to take a cab than a bus. With the cab you paid at the end of the ride

instead of the beginning”

Argentina case study (II)

Counter-measures by Domning Carvallo (Foreign Minister)

1.Convertibility Law -Legally anchored the Argentine currency to the US Dollar , 1 peso for dollar and prohibited restrictions of foreign payments.-Gold Standard : The value of the currency was defined in terms of Gold , for which the currency could be exchanged.2.Acceleration of privatization , deregulation and opening up the Argentinean economy3.Increased the confidence and lowered the transaction costs.

First effects of Deep Globalization policies based on Washington consensus “Golden Straitjakect”Hyperinflation was eliminated -Restored price stability-It generated credibility and confidence and led to large capital inflows.Investment , exports and incomes all rose rapidly.

Argentine Crises III

A snapshot of history 1998-2002

⇒ Real Gross Domestic Product (GDP) fell 28%⇒ Peso linked to the $ at 1$ was devalued and depreciated to nearly 4$ per 1Peso⇒ The poverty rate rose from 25.9% in 1998 to 57.5% in 2002.⇒ In real terms wages fell from 27% in 2002⇒ Debt at $82,268 : Declared it would miss payment on foreign debt in November 2001. Actual payment missed on Jan 3, 2002. Debt was restructured through a distressed exchange offering where the bondholders received haircuts of approximately 70%.⇒ Creditworthiness slid below some African countries

What went wrong ?External Factors-Brasil currency crisis ⇒ Reduced the BRL by 40% against the dollar , allowing Brazilian exporters to charge much lower dollar prices on foreign markets.-Asian Financial crisis ==> Reduced national money managers` appetite for emerging markets.Internal Factors -Austerity policies form the Argentinian government , devaluation of pesos and default on their foregin debt.’

Clash between Politics and Hyperglobalization-National democracy and deep globalization are incompatible.Democratic politics casts a long shadow on financial markets and makes it impossible for a nation to integrate deeply with the world economy.a)Overestimation of the Peso , and the linkage with a strong , not so flexible currency as $b)Contracts with all domestic constituencies-public employees ,pensioners , provincial governments , bank depositors.Deep integration cannot sustain itself even when its requirements and goals are fully internalized by a country’s political leadership.

Nation State and Democratic Politics

Hyperglobalization

Democratic PoliticsNation State

Bretton Woods Compromise

Establishment of the Bretton Woods SystemBetton woods compromise

After WWII the new international system would draw on the lesson of the previous gold standards and the experience of the Great Depression and provide the postwar reconstruction.The goal was to create a system that would not only avoid the rigidity of previous IMS , but would also address the lack of cooperation among the countries in the system.-Ensure exchange rate stability -Prevent competitive devaluations-Promote economic growth

IMF International Monetary Fund ==> would monitor exchange rates and lend reserve currencies to nations with balance of payments deficits. When a country joins the IMF , it receives a quota based on its relative position in the world economy., which determinants how much it countries to the fund.-Countries agree to keep their currencies fixed but adjustable (within a 1 percent band) to the dollar and the dollar was fixed to gold at 35$ an ounce. The international bank for Reconstruction and Development (World Bank Group) , was responsible for providing financial assistance for the reconstruction after WWII and the economic development of less developed countries.

Bretton Woods-GATT System⇒The essence of the Bretton Woods-GATT regime : Was that countries were free to dance to their own tune as long as they removed a number of border restrictions on trade and generally did not discriminate among their trade partners.

-In the area of international trade, countries were allowed to maintain restrictions on capital flows.

-In the area of trade, the rules frowned upon quantitative restrictions but not import tariffs.

Structure of Bretton Woods system⇒ General Agreement on Tariffs and Trade (GATT)a)Most favored nations which stated that(MFN) ⇒ each contracting party to the GATT is required to provide to all other contracting parties the same conditions of trade as the most favourable terms it extends to any one of them.b)Reciprocity ⇒ Advocating the Right and Obligation of the contracting parties. Each contracting party has a right, e.g. access to markets of other trading partners on a MFN basis but also an obligation to reciprocate with trade concessions on a MFN basis. c)Transparency ⇒ limited the use of quotas, except in some specific sector such, as agriculture and advocated import regimes that are based on “tariff-only”.Required many notifications from contracting parties on their agricultural and trade policies so that these can be examined by other parties to ensure that they are GATT compatible.d) Tariff binding and Reduction : Tariff were the main form of trade protection and negotiations in the early years focused primarily upon tariff binding and reduction.

Advantages of the Bretton Woods System

Advantages ⇒

-Expansion on International Trade and Investments.

-Stable macroeconomic performance (low rate of inflation , real per capita growth, interest rate were low and stable.

-Currency were convertible to gold , but countries had the ability to change par values.

Weakness of the Bretton Woods System⇒ Capital movement restriction

⇒ The pressure Bretton Woods put on the United States.-USA were not willing to supply the amount of gold that was demanded.

⇒ Internal objective of Growth and Full Employment sacrified-When countries faced with “Fundamental Disequilibrum “ they have less foreign exchange reserves. Internal measures tend to rise prices , rise unemployment and reduce economic growth.

⇒ International Competitive Environment bypassed.- to make the home product more competitive in the foreign market, what is required is the change in domestic economic policies so that the country’s export products get larger foothold in the foreign market.

Weakness of the Bretton Woods System II⇒ Encouragement of Speculation : Which to led to failure of the system in 1971 due to speculation on the dollar

-Referred as the “Nixon Shock” , in 1971 there was a surplus of Dollars due to foreign aid , military spending and foreign investment , the USA did not have enough gold to support the convertability of gold at the rate 35$ per ounce. The fear that the Dollar was overestimated was rising. In order to protect the dollar from the attacks of international money speculators. Nixon directed that an extra 10 percent tariff be levied on all dutiable imports; like the suspension of the dollar’s gold convertibility, this measure was intended to induce the United States’ major trading partners to adjust the value of their currencies upward and the level of their trade barriers downward so as to allow for more imports from the United States.

⇒ In March 1973 : The G–10 approved an arrangement wherein six members of the European Community tied their currencies together and jointly floated against the U.S. dollar, a decision that effectively signaled the abandonment of the Bretton Woods fixed exchange rate system in favor of the current system of floating exchange rates.

Hyperglobalization and Democratic Choices

Hyperglobalization

Democratic ChoicesNation State

Global Governance


1)Labor standards⇒ Regulation that cover employment practices : Dictate who can work , the minimum wage , the maximum hours of work , the nature of working condition ,what the employer can ask the worker to do , and how easily the worker can be fired.-People are the best judge of their interests (regarding the working condition and safety) vs what may be good for an individual worker may not be good for a worker as a whole (bargaining power)Importance to Trade :-Outsourcing and Domestic workers-Sharing of the Economic value created between employee and employers

Hyperglobalization and Democratic Choices 2) Corporate Tax Competition⇒ The International mobility of firms and of capital also restricts a nation's ability to choose the tax structure that best reflects its need preferences.-Shifts the tax burden from capital , which is internationally mobile , to labor , which is much less so.⇒ International Tax Competition : OECD countries , excluding the United States , has fallen from 50% in 1981 to 30% in 2009 and in the United States from 50% to 39% in the same period.To have International Tax Competition : Countries must have removed their Capital controls.When such control are in place , capital and profits cannot move as easily across national borders and there is no downward pressure on capital taxes.

Challenge ⇒ To safeguard the integrity of each nation's corporate tax regime in a world where enterprises and their capital are footloose.

Hyperglobalization and Democratic Choices 3)Health and Safety StandardsThe WTO's agreement on Sanitary and Phytosanitary (SPS) Recognizes the right of nations to apply measures that protect human , animal or plant life or health, but these measures must confront to international standards or be based on scientific principles.-Thai cigarettes ⇒ Imposed a ban on foreign cigarettes , but allow the sale of domestic cigarettes. WTO Panel ruled against Thai , arguing that it was discriminatory policy and attained its public health objectives at less cost to trade by pursuing alternative policies.-EU beef hormones⇒ Ban on beef certain growth hormones , in applied to both domestic and imported beef alike.WTO Panel ruled against EU : The ban was violating the requirement is th SPS Agreement that policies be based on “scientific evidence”Trade off between economic benefits against uncertain health risksShould a democratic country be allowed to determine its own rules - and make its own mistakes ? Does to WTO's agreement trump the democratic decisions of countries or EU ?


4)Regulatory takingsBIT(Bilateral investment treaty) and RTA(Regional trade agreements) objective is to provide a higher level of security to foreign investors by undertaking stronger external commitments.The treaties include a general expectation to allow governments to pursue policies in the interests of public good , but when this matters are analyzed in internationalcourts difference starts may apply.

Nafta (North American free trade agreement).-US firm and Mexican government Grant about the construction permit for toxic waste facility ⇒ Awarded 15.6 Million $-US chemical company and Canadian governmentBan on a gasoline additive ⇒ Awarded 13 Million $

South African and Black empowerment program and Italian mining companies.


5)Industrial policies in developing nations.

The WTO has put several external restrictions for developing nations such as :

a)Export subsidies : Illegal for poor nations , denying developing nations the benefit of export-processing zones. “Domestic content requirements” (China and Southeast Asia)

b)Patent and Copyright laws-South Korea and Taiwan

c)Intellectual Property Rights (TRIPS)-Impaires the ability of developing nations to reverse.engineer and copy advance technologies used in rich countries.

Global Governance⇒ In the first two option that we saw we either needed to sacrifice Deep Globalization or Democratic choices but there is a third option when we don't need to sacrifice neither.

⇒ Global Governance : “Robust global institutions with regulatory and standard-setting powers would align legal and political jurisdiction with the reach of markets and remove the transaction costs associated with national borders. If they could be endowed with adequate accountability and legitimacy in addition, politics need not ,and would not shrink it would relocate to the global level” “Dani Rodrik”

⇒ A movement towards global governance would be a necessity a diminution of national sovereignty. National governments would not disappear , but their powers would be severely circumscribed by supranational rule making and enforcing bodies empower and constrained by democratic legitimacy

⇒ Regional example of Global Governance ⇒ European Union

Different approaches toward Global Governance1)Eichengreen and Baldwin ⇒ Tighter international rules administered by some kind of technocracy : An international bankruptcy court , a world financial organization , an international bank charter , an international lender of last resort.

2)Anne-Marie Slaughter ⇒ Transnational networks created by regulators , judges and even legislators.These networks extend the reach of government mechanisms , allow persuasion and information sharing across national borders , contribute to the formation of international norms and agreements in nations where the domestic capacity is weak.

3)John Reggie ⇒ Global civil society can play a parallel role , establishing norms of corporate social responsibility in human rights , labor practices , health and anti-corruption and the environment.The goal is to allow the private sector to shoulder some of the functions that states find difficult to finance and carry out , as in public health and environmental protection , narrowing the governance gap between international markets and national governments.

4)Cohen and Sabel ⇒ Global political community with people coming to share a common identity as member of an “organized global populace”. At the end of the day true Global Governance requires individuals who feel that they are global citizens.

Conclusion⇒ Restrict Democracy : In the interest of minimizing international transaction costs, disregarding the economic and social whiplash that the global occasionally produces

⇒ Limit Globalization : In the hope of building democracy legitimacy at home

⇒ Globalize Democracy : This will come at the cost of giving up national sovereignty.

Pick two….any two !

Hyperglobalization

Democratic ChoicesNation State

The “Golden Straitjacket”

Bretton Woods compromise

Global Governance

References-Dani Rodrik (2011) , The Globalization Paradox , The Political Trilemma of World Economy.

the globalization paradox

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