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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Wikileaks etc: Quis custodiet ipsos custodes answered?

If I were an optimist I would write the following:

In Plato’s Republic, Socrates is asked  “quis custodiet ipsos custodes?” – who will watch the watchers and ensure the morality of those who govern? It is a question that has pervaded the construction (and dissolution) of governance mechanisms since, notably through the separation of powers between different arms of government. Yet at its heart the question frames the paradox that emerges from this question of governance: how can we ascertain who is corruptible and who is not?

Such questions have long remained sequestered to the realm of academics and philosophers, while government and governance eschewed such existentialism and instead functioned on varying notions of power and influence and the pragmatic realities they permitted. And so evolved the world from the time of Socrates to the not-so-distant past.

That all changed in the latter half of the 20th century with the advent of the Internet. Suddenly the massive information, and subsequently power, asymmetries that accrued to states were liable to be usurped. Governments’ inviolable hold on power and governance suddenly faced a purposeful challenger enabled by technology. For prior to the Internet’s arrival, the engagement of private or non-governmental actors in governance was largely defined by territory, and therein according to the legitimacy granted to these actors by the state. Very real limits existed related to the projection of ideas and the power of social movements. Where foundational change did occur, such as the 1960s civil rights movement or the earlier rise of nationalist movements for decolonization, it was largely a product of the convergence of mass civil protest and intra-class alliances, achieved over periods of years, if not decades.

Thereafter, however, technology has allowed for the democratization of participation in the processes of governance, and a dramatic shift in the temporal sequence of participation and change from years to seconds. Read the rest of this entry »


I make a depressing lunch date.

I’ve been away from my writing for two months now. The purchase and gutting of a house, on top of my regular day job, has been hectic. It also coincides with a period of real intellectual confusion that I’ve experienced over the past several months as the reality of global economic patterns, as well as political rhetoric, swirl to create a rather depressing outlook.

That outlook (which contributed to a rather famous author calling our lunch meeting the most depressing he’d ever had) builds on several announcements, pronouncements and trends that have much smarter men than I very confused as to where the global economy is going.

Much of this began, or was highlighted by the late June G20 meetings in Toronto, where the leaders of the G20 + agreed to make deficit reduction an immediate to mid-term priority (admittedly a decision that lacks any teeth whatsoever and comes with repeated allowances for “national priorities”). This despite the fact that the global economy shows no fundamental signs of real recovery.

Sure the markets have rebounded but this has been on the basis of corporate profits rather than economic data. What’s the difference you ask? Corporate profits increase as companies reap the benefits of decreased wage costs. Thus with large layoffs, as experienced during the past two years of crisis, profits are the first thing to accompany a return to stability.

Unfortunately such positive profits can be short-lived if there isn’t a commensurate increase in employment levels and exports. Read the rest of this entry »


US patience wearing thin re: Chinese Yuan?

Beware the unintended consequences of short-term thinking

The release of China’s export trade numbers for May have released a torrent of unease from US policymakers and politicians related to the ongoing debate over the valuation of China’s currency.

Across both parties in Congress, calls are increasing to promote legislation that would explicitly limit Chinese imports to the American market. US Treasury Secretary Timothy Geithner noted, ““I think the strength of the sentiment in Congress is overwhelmingly strong , it’s bipartisan and it reflects how important this is to the United States.”

And no one can dispute how important Sino-American trade is to both countries.

China has relied on it for over 30 years to bring millions out of poverty. And despite the rising share of Chinese exports headed to other markets (especially the developing world), the US is still China’s largest export destination, accounting for nearly 20 per cent of exports in 2009. Barriers to trade with the US would thus pose a great threat to China’s continuing economic growth.

And while the US may complain about the policies China has utilized to ensure its competitive advantage, lest the Americans forget Read the rest of this entry »


The Age of Austerity

Thoughts on the next hundred years.

While Canada might avoid the worst of the austerity and sacrifice that is sweeping through Europe on the heels of Greece’s near bankruptcy, the effects on the global economy, including ours, cannot be ignored.

Stimulus spending may have mitigated the worst of the past 24 months of global financial crisis, but the accumulated deficits and mounting debts they added to may lead to a prolonged period of muted growth if not recession. And so in order to meet the financial obligations set by a divergent set of interests related to labour on one hand and service provision on the other, something has to give.

In theory, governments have three choices when mired in what most would call near-default positions:

1.      Raise taxes.
2.      Cut services.
3.      Cut the cost of service.

The most straightforward approach would be to simply raise taxes in order to increase government revenue. However given already strained constituent pocketbooks, there’s a limit to how much even the most progressive taxes could be raised.

Moreover, raising taxes is usually tantamount to political suicide and thus ranks quite low on a politicians radar. This despite the fact that at some point citizens may need to re-examine how much universal services cost and what share we’re willing to pick up in order to keep them going.

The next alternative is to cut back on services. Yet as I’ve written previously, despite our complaints on service provision and social spending, Canada on a whole ranks in the middle of the pack when it comes to spending on what most would think are the most important elements of a sound economy (education, health and social services). Most would tell you that there are no extraneous services left.

So far then, we’re neither ready to pay more in taxes, nor cut back in the current level of service provision we receive.

What’s left to be done?

Well, perhaps we’re due for a pay cut.

Heresy, you say?

Read the rest of this entry »


Brazil’s emergence cont’d

As a follow up to my last post on Brazil, here’s a fantastic documentary about the country’s rise in global affairs produced by Al Jazeera:


Brazil’s diplomatic emergence

Justice and economic diplomacy as an alternative to ideology and power politics

Amongst the key research questions I’m looking at right now is the question of how emerging powers in global affairs will impact the current architecture of global governance. In particular, are powerful states incented to become collaborating partners of existing international institutions or is there space for alternative institutional arrangements that would in effect split the world up into a bi (or multi)-polar governance order. Or, perhaps more likely, how will new emerging powers alter the architecture and culture of existing institutions?

Today’s announcement of a deal on Iran’s nuclear enrichment program brokered by Turkey and Brazil speaks to the ongoing evolution of these structures. For while Washington has spent the Read the rest of this entry »