Global Policy Forum

By Chakravarthi Raghavan

In a research paper titled How to Save Globalisation from its Cheerleaders , and published on his website, Dani Rodrik, Professor of international political economy at Harvard's JFK School of Government argues that in the current realities of the world, pursuit of perfect globalisation - more openness - endangers the present imperfect, but still remarkable globalisation, by intensifying conflicts that the system inevitably generates.

Prof Rodrik's paper is premised on the view that globalisation, in some appropriate form, is a major engine of economic growth. However, several of its paradoxical features, affecting both rich and poor countries, require that its rules need to be rethought.

Globalisations' chief beneficiaries are not necessarily those with the most open economic policies. Globalisation has come with frequent financial crises and considerable amounts of instability. Both are costly and in principle avoidable. Even more, globalisation remains unpopular among large segments of the people it is supposed to benefit, especially in rich countries.

In this situation, there is now an emerging new conventional wisdom and new orthodoxy that to reap the benefits of trade and financial globalisation, better domestic institutions are needed - improved safety nets in rich countries and improved governance in poor countries.

This improved strategy of "more of the same but better" is on the presumption that insufficiently open markets continue to be an important constraint on the world economy. Hence, the concerns of the proponents of this new orthodoxy centre on institutional reforms needed in countries and internationally to ensure that further market openings are politically acceptable and sustainable.

Challenging this presumption, Prof Rodrik argues for an alternative approach - that of enhancing policy space rather than market access. It is lack of policy space, and not lack of market access, that is proving a real binding constraint on a prosperous global economy, he insists in his paper.

The absence of evidence on direct benefits of financial globalisation, Prof Rodrik notes, is such that proponents and researchers are turning to indirect benefits (to promote financial liberalization). And financial globalisation has not enhanced risk sharing and consumption smoothing for developing nations. If anything, the evidence points in the reverse direction. Moreover, one noticeable consequence of financial globalisation has been a series of costly financial crashes - in Mexico, Thailand, Indonesia, South Korea, Russia, Argentina, Turkey, and many other countries. This has forced developing nations to accumulate huge amounts of foreign reserves in order to purchase self-insurance against the fickleness of financial-market sentiment.

In recent years, the world economy has avoided similar financial crises, indicating that developing nations have become more resilient to financial turbulence. But this is due in no small part to the mountains of liquidity that developing nations now sit on. It is also due to the fact that many emerging markets are now running trade surpluses - i.e., lending money to the rest of the world. In other words, in order to protect themselves from the whiplash of financial crises, developing countries have been forced not only to shun its benefits, but to make transfers to rich countries on top!

A third paradox of globalisation is that it remains restricted in precisely those areas where further relaxation of barriers would yield the greatest economic benefits. Barriers on labour mobility in particular are inordinately higher than they are anywhere else. Even minor reductions in labour-market barriers would generate gains that are vastly larger than those from the conventional areas under negotiation in the WTO and elsewhere. Some estimates suggest that even a temporary South-to-North labour mobility scheme that would expand the industrialised countries' labour force by about three per cent would result in benefit to nationals of poor countries of $262.5 billion per annum. By contrast, current estimates of the gains to developing countries from the completion of the Doha Round do not exceed $30 billion.

Globalisation has produced not only paradoxical outcomes for developing countries, but remains quite unpopular in most advanced countries. So much so that even such boosters of globalisation like Paul Krugman, Larry Summers and Alan Binder are acknowledging that globalisation is contributing to inequality and insecurity. In response, a new conventional wisdom is emerging that globalisation needs a range of institutional complements in both rich and poor countries, with a multi-pronged effort to deepen globalisation - the Doha development agenda with focus on agricultural liberalisation.

However, the Doha process seems dead on its tracks due to a combination of unwillingness of the rich countries to offer substantial cuts in agricultural supports and market access and the reticence of developing nations to offer low enough bindings on their own tariffs. While these efforts may be useful in themselves, Prof Rodrik challenges the view that such global reforms can help increased openness and market access, and thus maintain a healthy global economy. Under certain conditions, economic integration can be a powerful force for economic convergence, and it can promote rapid economic growth in poorer regions, he concedes, citing the example of the US and the benefits of its nationally established and integrated set of product, capital, and labour markets. However, the US showed that achieving integration of this kind is not just a matter of eliminating barriers to inter-state commerce (which are prohibited in the constitution itself), but required many more things. A national market required a national policy. Only then the transaction costs associated with jurisdictional and legal discontinuance across state lines eroded sufficiently to permit economic convergence.

The European Union was currently presenting significant growing pains associated with efforts to create seamless integration. The EU is engaged in a process of legal, institutional, political integration that is somewhat similar to the process that took the United States some two centuries.

Even with all the progress being made, this, convergence within the EU is far from complete, and remains a stop-and-go process.