The Governance of Globalization
As
the market economy has matured within countries, there has been increasing
recognition of the importance of having rules to govern it. One hundred fifty
years ago, in many parts of the world, there was a domestic process that was in
some ways analogous to globalization. In the United States, government promoted
the formation of the national economy, the building of the railroads, and the
development of the telegraph-all of which reduced transportation and
communication costs within the United States. As that process occurred, the
democratically elected national government provided oversight: supervising and
regulating, balancing interests, tempering crises, and limiting adverse
consequences of this very large change in economic structure. So, for instance,
in 1863 the U.S. government established the first financial-banking regulatory
authority-the Office of the Comptroller of Currency-because it was important to
have strong national banks, and that requires strong regulation.
The
United States, among the least statist of the industrial democracies, adopted
other policies. Agriculture, the central industry of the United States in the
mid-nineteenth century, was supported by the 1862 Morrill Act, which
established research, extension, and teaching programs. That system worked
extremely well and is widely credited with playing a central role in the
enormous increases in agricultural productivity over the last century and a
half. We established an industrial policy for other fledgling industries,
including radio and civil aviation. The beginning of the telecommunications
industry, with the first telegraph line between Baltimore and Washington, D.C.,
was funded by the federal government. And it is a tradition that has continued,
with the U.S. government's founding of the Internet.
By
contrast, in the current process of globalization we have a system of what I
call global governance without global government. International institutions
like the World Trade Organization, the IMF, the World Bank, and others provide an
ad hoc system of global governance, but it is a far cry from global government
and lacks democratic accountability. Although it is perhaps better than not
having any system of global governance, the system is structured not to serve
general interests or assure equitable results. This not only raises issues of
whether broader values are given short shrift; it does not even promote growth
as much as an alternative might.
Consider
the contrast between how economic decisions are made inside the United States
and how they are made in the international economic institutions. In this
country, economic decisions within the administration are undertaken largely by
the National Economic Council, which includes the secretary of labor, the
secretary of commerce, the chairman of the Council of Economic Advisers, the
treasury secretary, the assistant attorney general for antitrust, and the U.S.
trade representative. The Treasury is only one vote and often gets voted down.
All of these officials, of course, are part of an administration that must face
Congress and the democratic electorate. But in the international arena, only
the voices of the financial community are heard. The IMF reports to the
ministers of finance and the governors of the central banks, and one of the
important items on its agenda is to make these central banks more
independent-and less democratically accountable. It might make little
difference if the IMF dealt only with matters of concern to the financial
community, such as the clearance of checks; but in fact, its policies affect
every aspect of life. It forces countries to have tight monetary and fiscal
policies: It evaluates the trade-off between inflation and unemployment, and in
that trade-off it always puts far more weight on inflation than on jobs.
The
problem with having the rules of the game dictated by the IMF-and thus by the
financial community-is not just a question of values (though that is important)
but also a question of ideology. The financial community's view of the world
predominates-even when there is little evidence in its support. Indeed, beliefs
on key issues are held so strongly that theoretical and empirical support of
the positions is viewed as hardly necessary.
Recall
again the IMF's position on liberalizing capital markets. As noted, the IMF
pushed a set of policies that exposed countries to serious risk. One might have
thought, given the evidence of the costs, that the IMF could offer plenty of
evidence that the policies also did some good. In fact, there was no such
evidence; the evidence that was available suggested that there was little if
any positive effect on growth. Ideology enabled IMF officials not only to
ignore the absence of benefits but also to overlook the evidence of the huge costs
imposed on countries.
The
trade-liberalization agenda has been set by the North, or more accurately, by
special interests in the North. Consequently, a disproportionate part of the
gains has accrued to the advanced industrial countries, and in some cases the
less-developed countries have actually been worse off. After the last round of
trade negotiations, the Uruguay Round that ended in 1994, the World Bank
calculated the gains and losses to each of the regions of the world. The United
States and Europe gained enormously. But sub-Saharan Africa, the poorest region
of the world, lost by about 2 percent because of terms-of-trade effects: The
trade negotiations opened their markets to manufactured goods produced by the
industrialized countries but did not open up the markets of Europe and the
United States to the agricultural goods in which poor countries often have a
comparative advantage. Nor did the trade agreements eliminate the subsidies to
agriculture that make it so hard for the developing countries to compete.
The
U.S. negotiations with China over its membership in the WTO displayed a double
standard bordering on the surreal. The U.S. trade representative, the chief
negotiator for the United States, began by insisting that China was a developed
country. Under WTO rules, developing countries are allowed longer transition
periods in which state subsidies and other departures from the WTO strictures
are permitted. China certainly wishes it were a developed country, with
Western-style per capita incomes. And since China has a lot of
"capitas," it's possible to multiply a huge number of people by very
small average incomes and conclude that the People's Republic is a big economy.
But China is not only a developing economy; it is a low-income developing
country. Yet the United States insisted that China be treated like a developed
country! China went along with the fiction; the negotiations dragged on so long
that China got some extra time to adjust. But the true hypocrisy was shown when
U.S. negotiators asked, in effect, for developing-country status for the United
States to get extra time to shelter the American textile industry.
Trade
negotiations in the service industries also illustrate the unlevel nature of
the playing field. Which service industries did the United States say were very
important? Financial services-industries in which Wall Street has a comparative
advantage. Construction industries and maritime services were not on the
agenda, because the developing countries would have a comparative advantage in
these sectors.
Consider
also intellectual-property rights, which are important if innovators are to
have incentives to innovate (though many of the corporate advocates of
intellectual property exaggerate its importance and fail to note that much of
the most important research, as in basic science and mathematics, is not
patentable). Intellectual-property rights, such as patents and trademarks, need
to balance the interests of producers with those of users-not only users in developing
countries, but researchers in developed countries. If we underprice the
profitability of innovation to the inventor, we deter invention. If we
overprice its cost to the research community and the end user, we retard its
diffusion and beneficial effects on living standards.
In
the final stages of the Uruguay negotiations, both the White House Office of
Science and Technology Policy and the Council of Economic Advisers worried that
we had not got the balance right-that the agreement put producers' interests
over users'. We worried that, with this imbalance, the rate of progress and
innovation might actually be impeded. After all, knowledge is the most
important input into research, and overly strong intellectual-property rights
can, in effect, increase the price of this input. We were also concerned about
the consequences of denying lifesaving medicines to the poor. This issue
subsequently gained international attention in the context of the provision of
AIDS medicines in South Africa [see "Medicine as a Luxury" by Merrill
Goozner, on page A7]. The international outrage forced the drug companies to
back down-and it appears that, going forward, the most adverse consequences
will be circumscribed. But it is worth noting that initially, even the Democratic
U.S. administration supported the pharmaceutical companies.
What
we were not fully aware of was another danger-what has come to be called
"biopiracy," which involves international drug companies patenting
traditional medicines. Not only do they seek to make money from
"resources" and knowledge that rightfully belong to the developing
countries, but in doing so they squelch domestic firms who long provided these
traditional medicines. While it is not clear whether these patents would hold
up in court if they were effectively challenged, it is clear that the
less-developed countries may not have the legal and financial resources
required to mount such a challenge. The issue has become the source of enormous
emotional, and potentially economic, concern throughout the developing world.
This fall, while I was in Ecuador visiting a village in the high Andes, the
Indian mayor railed against how globalization had led to biopiracy.
September
11 brought home a still darker side of globalization-it provided a global arena
for terrorists. But the ensuing events and discussions highlighted broader
aspects of the globalization debate. It made clear how untenable American
unilateralist positions were. President Bush, who had unilaterally rejected the
international agreement to address one of the long-term global risks perceived
by countries around the world-global warming, in which the United States is the
largest culprit-called for a global alliance against terrorism. The
administration realized that success would require concerted action by all.
One
of the ways to fight terrorists, Washington soon discovered, was to cut off
their sources of funding. Ever since the East Asian crisis, global attention
had focused on the secretive offshore banking centers. Discussions following
that crisis focused on the importance of good information-transparency, or
openness--but this was intended for the developing countries. As international
discussions turned to the lack of transparency shown by the IMF and the
offshore banking centers, the U.S. Treasury changed its tune. It is not because
these secretive banking havens provide better services than those provided by
banks in New York or London that billions have been put there; the secrecy
serves a variety of nefarious purposes-including avoiding taxation and money
laundering. These institutions could be shut down overnight--or forced to
comply with international norms--if the United States and the other leading
countries wanted. They continue to exist because they serve the interests of
the financial community and the wealthy. Their continuing existence is no
accident. Indeed, the OECD drafted an agreement to limit their scope-and before
September 11, the Bush administration unilaterally walked away from this
agreement too. How foolish this looks now in retrospect! Had it been embraced,
we would have been further along the road to controlling the flow of money into
the hands of the terrorists.
There
is one more aspect to the aftermath of September 11 worth noting here. The
United States was already in recession, but the attack made matters worse. It
used to be said that when the United States sneezed, Mexico caught a cold. With
globalization, when the United States sneezes, much of the rest of the world
risks catching pneumonia. And the United States now has a bad case of the flu.
With globalization, mismanaged macroeconomic policy in the United States-the
failure to design an effective stimulus package--has global consequences. But
around the world, anger at the traditional IMF policies is growing. The
developing countries are saying to the industrialized nations: "When you
face a slowdown, you follow the precepts that we are all taught in our economic
courses: You adopt expansionary monetary and fiscal policies. But when we face
a slowdown, you insist on contractionary policies. For you, deficits are okay;
for us, they are impermissible-even if we can raise the funds through 'selling
forward,' say, some natural resources." A heightened sense of inequity
prevails, partly because the consequences of maintaining contractionary
policies are so great.
Global Social Justice
Today,
in much of the developing world, globalization is being questioned. For
instance, in Latin America, after a short burst of growth in the early 1990s,
stagnation and recession have set in. The growth was not sustained-some might
say, was not sustainable. Indeed, at this juncture, the growth record of the
so-called post-reform era looks no better, and in some countries much worse,
than in the widely criticized import-substitution period of the 1950s and 1960s
when Latin countries tried to industrialize by discouraging imports. Indeed,
reform critics point out that the burst of growth in the early 1990s was little
more than a "catch-up" that did not even make up for the lost decade
of the 1980s.
Throughout
the region, people are asking: "Has reform failed or has globalization
failed?" The distinction is perhaps artificial, for globalization was at
the center of the reforms. Even in those countries that have managed to grow,
such as Mexico, the benefits have accrued largely to the upper 30 percent and
have been even more concentrated in the top 10 percent. Those at the bottom have
gained little; many are even worse off. The reforms have exposed countries to
greater risk, and the risks have been borne disproportionately by those least
able to cope with them. Just as in many countries where the pacing and
sequencing of reforms has resulted in job destruction outmatching job creation,
so too has the exposure to risk outmatched the ability to create institutions
for coping with risk, including effective safety nets.
In
this bleak landscape, there are some positive signs. Those in the North have
become more aware of the inequities of the global economic architecture. The
agreement at Doha to hold a new round of trade negotiations-the
"Development Round"-promises to rectify some of the imbalances of the
past. There has been a marked change in the rhetoric of the international
economic institutions-at least they talk about poverty. At the World Bank,
there have been some real reforms; there has been some progress in translating
the rhetoric into reality-in ensuring that the voices of the poor are heard and
the concerns of the developing countries are listened to. But elsewhere, there
is often a gap between the rhetoric and the reality. Serious reforms in
governance, in who makes decisions and how they are made, are not on the table.
If one of the problems at the IMF has been that the ideology, interests, and
perspectives of the financial community in the advanced industrialized
countries have been given disproportionate weight (in matters whose effects go
well beyond finance), then the prospects for success in the current discussions
of reform, in which the same parties continue to predominate, are bleak. They
are more likely to result in slight changes in the shape of the table, not
changes in who is at the table or what is on the agenda.
September
11 has resulted in a global alliance against terrorism. What we now need is not
just an alliance against evil, but an alliance for something positive-a global
alliance for reducing poverty and for creating a better environment, an
alliance for creating a global society with more social justice.