Globalization’s next stage

The following was published as part of the Centre for International Governance Innovation (CIGI)’s partnership with the Institute on Net Economic Thinking, and is available online here.

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From Multi- to Mini- lateralism…

“Politics has returned to the national.” Those were the words of former British Prime Minister Gordon Brown at the INET conference on April 8–11, 2011. He called for renewed vigour to be applied towards developing cooperative economic and regulatory standards in the face of significant retrenchments towards national economic spheres. As the global economy emerges from the uncertainty of the post-2007 global economic crisis, its future architecture remains clouded from view as a result of continued challenges to the development of a truly representative and practical set of global economic and financial regulatory standards that can better enable sustained progress and development well into the twenty-first century.

This brief paper highlights the tensions and dynamic interplay of domestic and international priorities that underline the challenges to future multilateralism noted at the INET conference. While the immediate post-crisis period was marked by an exceptional degree of coordination related to stimulus spending, interest rate policies and bailout programs, the still-evolving transition to a new normal highlights the increasing tension between long-term global economic cooperation and short-term domestic priorities.

Re-asserting Domestic Sovereignty

While the turn towards the domestic may be novel in contemporary economic governance, it is not without precedent. International relations theorist Peter Katzenstein’s findings on the impact that transitional periods in the global economy have on this two-level dynamic are reflective of this contemporary tension. Katzenstein found that when the structures and hierarchy of the global economy can no longer be assumed to be fixed, “the relative importance of domestic forces in shaping foreign economic policy increased” (Katzenstein, 1978: 595) Katzenstein’s work continues to ring true when applied to the global economy today, where current tensions have their roots both in the previous three years of economic turmoil, as well as in the rapid and intense shift of the locus of economic influence from Washington, London and Brussels to Rio, Beijing and Mumbai. Brown’s comment that “the US and European Union are at risk of being out-everything’d by the rest of the world” is indicative of an increasingly tenuous balance between producers in emerging economies and their rich world consumers. The growing employment needs in both, though structurally distinct, highlight a fundamental challenge to sustained economic cooperation.

The subsequent rise of economic nationalism, albeit still nascent, follows on such immediate and future employment needs and poses a grave threat to the global economy given the barriers such policies raise vis-à-vis the establishment of global economic and financial standards. The world of economic and regulatory multilateralism that marked the second half of the twentieth century is at risk of giving way to an increased focus on “mini-lateralism,” both its regional and bilateral varieties, in the early stages of the twenty-first century.

Among the many lessons served by the post-2007 global financial crisis, none has been as revealing as the level of economic interdependence present. As Claudio Borio of the Bank for International Settlements noted in his presentation on the complexity of international finance, “there is no longer such a thing as absolute sovereignty in economic governance.” Despite the Anglo-Saxon roots of the crisis, the complex integration of domestic financial structures into international networks helped precipitate the bankruptcy of Iceland and the failure of financial institutions in at least a dozen countries across the globe. The broader macroeconomic impact of the crisis saw 10 countries seek emergency lending from the International Monetary Fund, and pushed many governments to nationalize formerly private institutions to ensure the stability of domestic economies.

The crisis revealed deep inadequacies within both global and domestic structures of economic and financial governance. However, it is at the domestic level that such inadequacies hit hardest. The crisis is estimated to have pushed 50 million people worldwide into unemployment (nearly a fifth of these were in the United States alone), and upwards of 200 million into extreme poverty (International Labour Organization, 2009). Subsequent national responses, including the use of capital controls on incoming investment, explicit intervention in volatile currency markets and increases in the use of both tariff and non-tariff barriers are indicative of domestic attempts to mitigate the excesses of economic globalization. As Eric Berglof from the European Bank for Reconstruction and Development noted at the conference, these moves represent the reassertion of host-country control over economic and financial globalization and the reversal of several decades of the prioritization of the rights of capital over other domestic interests.

The prohibitive costs of the crisis are far from the sole cause of the shift away from multilateralism, which is occurring despite the advent of the G20. Rather, the perceived benefits of economic globalization have begun to be clouded by an increasing body of research that links the processes of global economic liberalization with increasing income inequality, and long-term unemployment and underemployment in developed economies. The conference played host to eye-opening presentations by Dalia Marin from the University of Munich and William Lazonik from the University of Massachusetts on European and US experiences with economic globalization over the past three decades. In particular, Marin’s work on European offshoring efforts, and their correlation with increasing domestic inequality, highlights the increased attention being paid to the potentially harmful domestic effects of global economic integration. Marin’s research found that offshoring by rich-country trade partners reduces domestic skill premiums by 20–30 percent, and when combined with increased executive compensation, has seen the gradual decline of highly skilled, middle-class wage levels. Similarly, Lazonik’s work on the decline of domestic employment and real wage levels in the United States finds a strong correlation between this decline and labour outsourcing and increased corporate profits.

It is subsequently of little surprise that the use of trade barriers and discriminatory regulation, whether explicit or “murky,” is of increasing popularity among developed economy governments as a means of mitigating the worst effects of economic globalization. According to World Bank figures, over 500 explicitly discriminatory trade measures have been implemented since 2008, with the vast majority implemented by industrialized countries. Of the 141 measures found to target least-developed country exports, over 100 have been implemented by G20 countries (Evenett, 2009).  Moreover, Bussiere et al. (2009: 41) found that 24 percent of all financial regulatory changes implemented in 2007 were unfavourable to multinational enterprises, up from 12 percent in 2003-2004. While periods of economic liberalization and globalization are empirically associated with economic growth, the long-term vulnerabilities and dislocations they produce at the domestic level may act as catalysts for the predominance of domestic or “mini-lateral” priorities over multilateral ones.

Conclusion

The global economic crisis highlights the limits of orthodox economic thought on the benefits of globalization. Aggregate growth measures alone do not properly capture the systemic vulnerabilities produced by economic liberalization on domestic constituencies. As Lord Adair Turner noted, “economics must begin to focus on job creation, rather than simple measures of economic growth, as the key indicator of economic progress.” The rise of protectionist economic strategies, be they a reaction to the complex interdependence of contemporary capital movements or a reaction to the social dislocations related to real wages and employment, signal a shift away from strict economic globalization to a more nuanced “mini-lateral” version that ensures space for, and a privileging of, the domestic over the international. The inherent vulnerabilities of the latter have proven to hold too great a degree of risk for domestic political leaders. When combined with the dramatic rise of emerging economic powers, globalization in the twenty-first century will likely be radically different from its twentieth century version, and is likely to return to the adage that all economics, like all politics, is ultimately local.

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Dan Herman is a Ph.D. student at the Balsillie School of International Affairs at Wilfrid Laurier University. His research focuses on the political economy of international trade.

Works Cited

Bussiere, M., E. Perez-Barreiro, R. Straub, and D. Taglioni (2009). “Protectionist Responses to the Crisis: Global Trends and Implications” (unpublished). Frankfurt: European Central Bank.

Evenett, Simon (2009).“Crisis-era protectionism one year after the Washington G20 meeting.” Global Trade Alert. November.

International Labour Organization (2009). “Tackling the global jobs crisis-recovery through decent work policies: Report of the Director-General,” International Labour Conference, 98th Session 2009, Report I(A), ILO, Geneva.

Katzenstein, Peter J. (ed.) (1978). Between Power and Plenty: Foreign Economic Policies of Advanced Industrial States. Madison: University of Wisconsin Press.

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Notes on two very distinct India’s

Few places we’ve visited over the past several years offered such stark contrasts as does India. For while places like Gurgaon, just outside of Delhi, or Mansoravar, on the outskirts of Jaipur, offered glimpses of the India that is leap-frogging into a modern future, much of the rest remains decades behind.

Those two suburbs are great examples of the India of the future – one with towering office buildings, throngs of bilingual, suited professionals and modern urban infrastructure. Home to every international and domestic heavyweight company imaginable, they’re at the heart of India’s outsourcing economy and a large part of the country’s accelerated growth rate since the late 1990s. And both are served, at least in part, by modern infrastructure. For example, Delhi’s subway puts Toronto’s to shame; construction began in 1998 and in the twelve years since they’ve put together 180kms of air-conditioned, bilingual and digital service, including a link to the airport. Evidently, as this NYTimes article notes, there’s much to be desired from the government’s service provision in Gurgaon, but relative to the rest of the country, it’s an oasis of modernity. Jaipur hopes to do the same as it builds a new 32km subway system to serve over 3.5 million citizens who are witnessing entire city blocks being rebuilt to office towers and shopping centres.

And while these cities are geared in part towards foreign multinationals, one of the most striking aspects of India’s marketplace is the strong set of domestic companies that seem to dominate the consumer space. From automobiles to textiles, domestic brands are front and centre. For example, I’d estimate that over three-quarters of the cars and trucks on the road are domestic led by Tata Motors, Mahindra and Maruti-Suzuki. Foreign brands seem very limited, with Hyundai the only one to stand out. The same rings true in infrastructure, construction, beverages and telecommunications where big names such as Tata, Reliance, Kingfisher and Bharti dominate on billboards and television advertisements throughout the country. Together, the domestic and international presence in India has contributed to a burgeoning middle class of between 50 and 200 million Indians (depending on the metrics used to define “middle class”, and a grouping that comprise over 40% of India’s population by 2025.

However, this picture of India marked by modern mega-suburbs, impressive research and development centres , and a growing middle class contrasts with the stark reality of much of the India we saw. This “other” India was far less developed than I had imagined, and was far more reminiscent of a sub-Saharan African standard of development than a Chinese one. And given India’s impressive post-1990s growth rate (average 8% growth since 2000) and its over 300 billion in foreign exchange reserves it’s easy to overlook the dramatic developmental challenges it still faces. Notably, and despite impressive efforts at decreasing poverty, it’s still home to the world’s largest number of malnourished children (very visible on the streets of Delhi) and approximately 40% of the population qualifies as living in poverty. Moreover, despite the bright lights and air conditioning that adorn India’s burgeoning corporate offices, energy demand far outstrips energy supply as witnessed by blackouts in each of the five cities we spent time in. And unlike my experience in China where I saw very broad and quite spread out development across both major and minor centres, India’s development is much more “spikey” and seems to have completely neglected non-urban centres. In contrast, throughout China I was consistently surprised at the scale of development and reconstruction in small cities, especially those far removed from the eastern seaboard. And finally, and perhaps most indicative of the cultural uniqueness that exits in India, was the continued relevance of caste amongst people we met, and their self-identification as belonging to one group and others from an another.

And thus while India’s massive demographic weight alone supports its rise as a superpower, doing so in a sustainable manner will largely be determined by the country’s ability to meet the concomitant challenges of poverty alleviation, broad nationwide development and energy security.  The country’s infatuation with security issues emanating from its northern neighbour, and a very heavy media focus on political corruption will be equally formative.

Ultimately, India’s rise is much more nuanced than I believed prior to my visit. For India’s aggregate economic figures, and the focus on its so-far successful democratic and federal model, conceal issues related to poverty and inequality that need to be addressed for the country to continue its upward trajectory. As Indian author Shashi Tharoor writes in the the Elephant, the Tiger & the Cellphone , “India in the first decade of the twenty-first century is a young country, an optimistic country, a country marching confidently towards the future…but it is still a land of land of contrasts, where millions lives wretched lives amid poverty and neglect… We must do much more to promote education, health care and an end to caste and gender discrimination. Only then can we produce Indians truly ready to take India to the top in the twenty-first century.”